#32 – The Do-Gooder

00:02 – Unveiling investment mysteries
05:24 – Market history insights
21:15 – Shifts in investment trends
28:59 – Taking calculated investment risks
39:34 – Stock selection strategies revealed
47:43 – Passion for Japan’s potential
54:01 – Book recommendations

STEPHEN CLAPHAM: Hi, welcome to the Behind the Balance Sheet podcast where we meet leading investors and commentators and educate ourselves about the world of investing and the world. Our mission is to remove some of the mystique around investing and improve our understanding of what makes a successful investment or indeed an unsuccessful one.

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STEPHEN CLAPHAM: My guest today is someone I’ve admired for a considerable time and I was really excited to spend an hour learning from Jonathan Ruffer is the founder of the eponymous 25 billion asset management firm, which has an outstanding track record.

STEPHEN CLAPHAM: Ruffer is also a keen financial historian who talks fondly of the 1937 stock exchange yearbook. He took away on a romantic getaway with his wife in this episode. He explains why he thinks the end could double why the equities age may be behind us.

STEPHEN CLAPHAM: Why inflation is here to stay and much, much more if you were to meet Jonathan, other than his obvious intellect, you would never guess at his success because he’s incredibly modest. He doesn’t like to be called a philanthropist and he calls his stellar performance of over a quarter of a century, a fluke, but it was no accident.

STEPHEN CLAPHAM: Jonathan is a courageous investor and yet risk averse and it’s this apparent contradiction which might just be the key to his success. And in a first for this podcast, Jonathan turns the tables and asks me the most difficult interview question of all time. You will laugh at my pathetic answer and I know you will enjoy this conversation.

STEPHEN CLAPHAM: So Jonathan, listen, thank you so much for coming on the podcast. I’m very excited to talk to you. I normally start by asking people, did you always want to be an investor? And I know you trained as a, well, you started as a stockbroker. You trained as a barrister, I think, and then you went on to set up rougher. So tell us a bit about that.

JONATHAN RUFFER: That’s right. Well, I did a lot of jobs in my twenties because I was useless at the mall. And I, so II, I was terribly good at dinner parties because whatever was mentioned, I could say, oh, yes, I’ve been one of theirs. But the truth is looking back on my life, I always wanted to be an investor.

JONATHAN RUFFER: I remember when I was about 11 coming across a book on charts and, being absolutely mesmerized by the, share price of diners Club and they were sharing, you know, sort of, you know, all the movements and what you had to look out for to see whether or not, the performance was going to be good.

JONATHAN RUFFER: And when I was 16, I went to work for the local stockbroking firm and the senior partner said to, you know, why are you interested in working for a stockbroker? And I did recall it, but evidently I gave the reply. I rather like the idea of something for nothing.

JONATHAN RUFFER: So this caused an absolute scandal. In the it was rather provincial Nostril hair of North Yorkshire. And what was the first stock you bought Guinness? Na na and I remember I paid 20 Shillings and sixpence for it and I sold it for 22.

JONATHAN RUFFER: So you were a trader to start with. I must have been, must have have.

STEPHEN CLAPHAM: I, and what happened that you went off to become a barrister? What was the, the rationale behind that?

JONATHAN RUFFER: I was persuaded that the theory of what made the world go round was best mediated through the understanding of law. Well, that was bollocks wasn’t true. I worked out much more slowly than I should have done. If you happen to have a talent for understanding how the law works, then run with it. But it’s if you want to know the meaning of life through law, get a life. How funny the.

STEPHEN CLAPHAM: Training, barrister training, does it have many benefits as an investor? I mean, is there anything that you think? Oh, well, I kind of understand that regulation.

JONATHAN RUFFER: Or it helps one understand the way of the world? So certainly setting up a business here just knowing how the law works is useful. So it’s, it’s a parallel really to understanding accounting principles. You don’t actually have to understand every detail of accounting to know that management accounts are quite a useful thing to have if you want to run a business. No. Absolutely.

STEPHEN CLAPHAM: But of course, it’s very important. All listeners should be very well versed if you want to invest in equity should be very well versed in accounting because obviously that’s what we do is we train people.

STEPHEN CLAPHAM: But I always like talking to people with a long history in markets because you have a much better perspective and you’ve talked about how we’ve had this sort of fantastic bull market since 1982 or whatever, not preparing people for the storms ahead. The, the, the problem I think is lots of even not young people, lots of even quite middle aged people are so accustomed to the best investment being equities.

STEPHEN CLAPHAM: They kind of have a blind faith in it. And I do a presentation on equities over a longer time frame over the last 150 years. And if you were born in 1900 now, 2000, you’d have a very different view on what equities do that. Can you just talk about that because you’ve got AAA long background and financial history, haven’t you?

JONATHAN RUFFER: Yeah, I’m, I’m really interested in history because it seems to me that investment, is about people, people’s behavior. And, the history of the markets is a history of how people behave across a full kaleidoscope of events. And, that’s what fascinates me. And I, I, I come to this conversation thinking that we will look back on probably a couple of years ago as being the high water Mark of equities.

JONATHAN RUFFER: I think equities are a dying investment opportunity. Now, that isn’t at all the same thing as saying, I’m bearish of equities because if you invest in a company, you can invest in different bits of the business. And I mean, I go back to the 19 twenties. Equities was really about ownership. If you wanted to take a business over, you wanted to control the business and the equities absolutely vital.

JONATHAN RUFFER: But the idea that buying 2% of, of a business in the stock market that, that is worth the same as the shares of the controller is counterintuitive. That’s not the way it is. I mean, if somebody earned 2% of rougher, then I wouldn’t even be nice to them. Ii, I would regard it as a coincidence. Now, why is it that equities?

JONATHAN RUFFER: If you do earn 2% you control a living part of a business? I think it’s the deal that was done between the management of companies and equities through stock options. That, that those two together, the shareholder and management were able to see off the workers and government. Those are, those are the four groups of people who have an interest in a pocket of prosperity.

STEPHEN CLAPHAM: We, we’ll come back to the relative power of the shareholder and the, and the manager, which is an interesting subject. But the, this idea that equities have been fantastic for the last 40 years. You don’t think they’re going to be so fantastic for the next 40 years.

JONATHAN RUFFER: No, I’m, I think, I think there are two answers to that single question. One is, how good an investment would it be to earn a slice of prosperity? We’ve had 40 years of prosperity. And I think the next move is sharply down. So regardless of whether it’s investment grade bonds, whether it’s private equity, whatever, I think the markets are going to be quite a dark place for an extended period of time.

STEPHEN CLAPHAM: Is that because you’re worried about inflation or is it because you’re worried about the fact that workers are clawing back more of the pie? I mean, what or do you think the valuations are high?

JONATHAN RUFFER: I mean, what, what’s your, I, I think it centers around around debt. I think there’s too much debt and I go rather back to, to nature. What’s the point of winter? Winter is quite a depressing place if you’re interested in the life of wildlife? Because you know, there are fewer bunny rabbits.

JONATHAN RUFFER: You know, the cockroaches all die off and you think, gosh, what a pity, wouldn’t it be nice if you could extend summer and early autumn? So that the lots of bunny rabbits can be happy and lots of cockroaches and lots of death will watch. Beetles can be there. And of course, actually what nature is demonstrating is that unless you have a cyclicality of growth and cut back.

JONATHAN RUFFER: The thing becomes distorted. Now, the way it becomes distorted is that the the markets, the people who drive markets want an amplified return and that’s most easily achieved by debt. And it isn’t simply that balance sheets are, are more geared than they were. You can have the equivalent of debt in behavioral terms.

JONATHAN RUFFER: Ss say that every corner is being cut, you know, just in time. I regard as a form of debt because you, you the cheaper you can supply your plum pudding to the customer, the bigger your margin and the more plum pies you’ll sell. But what we can now see is that globalization was an exercise in danger in the same way that gearing is an exercise in danger. Interesting.

STEPHEN CLAPHAM: I mean, I was reading sir Tim Clark, the President of Emirates saying that they’re now sending staff to the production line on at Boeing for the first time because they’re only concerned about it.

STEPHEN CLAPHAM: But that is that a manifestation of what you’re saying? Yeah, but one thing I was just going to ask you about on this sort of macro topic of the market.

STEPHEN CLAPHAM: Inflation. I mean, you think inflation’s here to say I do.

JONATHAN RUFFER: Yeah, why I think there are two outstanding factors which make me think that the price level is not going to hold steady. And one of them we’ve just touched on which is globalization. We’re now in a world of deg globalization and in societal terms, that has to be a good thing.

JONATHAN RUFFER: Ii I have another life up in the northeast and you see the advantages of having local engineering skills. It means that you can, you can get things done in the house that you wouldn’t be able to do if that didn’t exist, the society that I see in 20 years time is that every nation will have all its own supply.

JONATHAN RUFFER: So whether, whether, whether it’s engineering, whether it’s retail, whether it’s biscuit, manufacturing, that will all be done locally. Now, that is enormously expensive against even how things were 30 years ago and compared with just in time.

JONATHAN RUFFER: So I see that as a one off but rolling capital cost which will have to be paid for and that will be paid for by inflation. But the other one is wages. Now I start off by looking at a profit making entity and asking myself who owns that not in a legal sense or even the moral sense, but whose interests are so integrated, wound up in that business that you can regard them as to some extent owners.

JONATHAN RUFFER: Now, there are really two, the guy who owns the factory is one of them and the guys who work in the factory are the other. So Karl Marx posited the right dynamic. It, it, it’s a battle between he called it capital and labor. And today we’d call it investors and labor.

JONATHAN RUFFER: And if you go back to you know, the black death in the 14th century, what you see is that this is like an arm wrestle and it goes backwards and forwards. And the fascinating thing is the thing that makes it a tipping point is when one or other is egregiously in charge.

JONATHAN RUFFER: So I was brought up in, in, in, in, in, in this world in the seventies when Unions in Britain had beer and sandwiches at number 10. And if you and I started Clapham Rougher, and, and we were going to make underwater basket weaving equipment and we discovered some incredible new add on which would rarely make our business fly back in the seventies.

JONATHAN RUFFER: You and I would have said, well, the Unions will just take that. Why should we invest capital which is quite hard to come by and simply see it taken by a fat and happy workforce. I don’t think that let’s let’s not bother. Now, that was an extreme which thatcher.

JONATHAN RUFFER: I mean, thatcher was an instrument more than a creator of a new dynamic. And now what you can see is that certainly by the time interest rates turned is that that move from the overwhelming power of the workforce to the overwhelming power of the investor was one of the major influences on how well the investors did or in in terms of dust capital, how well the capitalists did.

JONATHAN RUFFER: So that tells me that the workforce is, you know, through strikes, through voting with their feet. You know, nobody wants to be a lorry driver.

JONATHAN RUFFER: You know, they put the wages up 30% and people said actually I’m fed up with peeing in a lemonade bottle. I definitely think I want to do it anymore. Those are the dynamics that cause inflation. So that’s why I’m an inflation. It’s got nothing to do with what Jerome Powell has to say. No, no, I.

STEPHEN CLAPHAM: Iii I get that. And II, I mean, I think you make very, very good points. I mean, I, I was gonna ask you because I, I kind of remember I was reading something you’d written or listening to something, you, you an, an interview with you, but you were talking about taking the 1937 Stock Exchange Year book on holiday when you’d gone off somewhere Fancy with your wife.

STEPHEN CLAPHAM: And I, I don’t know how, you know, whether she was so pleased about that, but you do a lot of this reading of the Contemporaneous accounts. And it’s quite interesting because like Russell Napier’s stuff goes through the Contemporaneous accounts.

STEPHEN CLAPHAM: It’s really fascinating to transport yourself. I’ve never thought of reading an old yearbook. Tell me, what do you get out of that? And if you know, if you’re, if a student is listening to this podcast, how would you recommend they would go about doing that and, and replicating what you do.

JONATHAN RUFFER: I think, if you will think in terms of the spirit of an age, what is it that, that people are preoccupied with? What is the way that they sing? What is it today? We think we’ve invented? But actually, has been there for, since time immemorial. And I, I wouldn’t recommend people starting with a, 1937 stock exchange yearbook, particularly if they’ve got a happy marriage.

JONATHAN RUFFER: But, that is the primary evidence. That’s what you go back to. You’ll see whether or not a thought is valid or not. Now, I, you know, one of the things I’m really interested in at the moment is the swing away from private equity to, private credit.

JONATHAN RUFFER: That feels like a big shift, but it’s actually no shift at all. It’s the reversal which is much wider than just in the private sector. But it’s a good example of a move which we saw the other way. Do you know who I mean by George Ross Gooby? Yes, he was one of the hearers of, the discovery of the equity market in the 19 fifties.

JONATHAN RUFFER: He, he spotted that equities were a coming asset class. And, given that, equities in limited liability companies had existed in England since 1840 it seemed quite late for a discovery, you know, it was like sort of discovering the opposite sex when you’re 37 you know, it didn’t seem like a, you know, an incredibly early adoption of an idea.

JONATHAN RUFFER: But if you go back, if you, if you read, the year books before the first World War, what you find is that really all equities traded, they were always either speculation. So if you wanted to earn, gold mines in South Africa in the 18 nineties and it was all done through the equity market.

JONATHAN RUFFER: But if you wanted to earn a decent business, you know, the brewery, for instance, deals were done in equities, but it was usually the younger sons selling them to an elder cousin because the equity was held by the families. And what trade did were different gradations of debt.

JONATHAN RUFFER: So at the top were the benches because they were secured against property and then one down that were, were unsecured land stocks and there might be five sequenced priorities in that. So if you wanted a little bit of a high yield, you drop from the second unsecured land stock to the fourth unsecured land stock.

JONATHAN RUFFER: So everybody was very sensitive as to the trading of these different classes of debt. And so if you were early onto Marks And Spencer’s, instead of saying I’ve made a fortune in the, the equities, what you would have bought just because you had to, you would have bought the 8% preference stock which would be trading at 300.

JONATHAN RUFFER: So it would have a yield of 2.3. But you wouldn’t be thinking to yourself, I’ve tripled my money. You’d be thinking, you know, I’ve got 8% from an incredibly safe source. So that was the way they thought you can see that it’s only a very small move to say, well, let’s, instead of thinking 8% which is safer than you’d want, I’m going to try to make money in this.

JONATHAN RUFFER: And actually, why don’t we do it in equities? Because quite a lot of these shares have now the families of high taxation, they’ve, they’ve, they, they, they, they’ve sold their controlling interests. So we might get to take it for a bit. So where are they all?

JONATHAN RUFFER: George Ross Gooby was doing was observing that in this new world equities look more interesting. Now, what fascinates me about private equity to private credit is here are some of the sharpest people in the world investing some of the sharpest money in the world.

JONATHAN RUFFER: They saying actually the interesting place to be is not in the Marks And Spencer’s equity, it’s in the 8% preference shares. And so so so in other words, in medieval terms, you didn’t talk about where the value of something was. He talked about where the virtue was and the idea that these inanimate objects had a spirit and you wanted to know where the locus of the spirit was.

JONATHAN RUFFER: And and, and so you would say, where is the virtue? Now, I think the virtue which moved from the fixed interest market into equities in the 19 fifties and then moved into the private sector so that, you know, David Svensson was the early adopter there. So he looked like a genius.

JONATHAN RUFFER: But all he was really doing was he was an early adopter of a trend that was bigger than him and was happening outside of him. And he was just happened to be standing on the hilltop observing it. Now, I think the two things we have to look at now is what happens when the prosperity finishes and when returns go back to the fixed interest market and away from, from equities.

STEPHEN CLAPHAM: If you’re right then that that is a hu huge shift in the way people think.

JONATHAN RUFFER: And I’m not saying I certainly do that. Like I think, you know, I’m, I’m, I’m still, I feel a bit like a politician in 1938 saying war is inevitable and then gain and cutting the defense expenditure.

STEPHEN CLAPHAM: Well, I mean that that’s a massive, massive issue, maybe come, come back to that. Look, your objective as a firm is to beat cash and to try not to lose money over a 12 month time frame. And the firm had a poor 2023. And I was interested to understand how you manage behavior after a setback like that because it’s really difficult to invest dispassionately when you’re behind.

STEPHEN CLAPHAM: And I’ve always found that’s like the most difficult thing because once you’re behind, it’s very difficult to claw it back and you can’t claw it back unless you take risks. But when you’re behind you, you don’t want to take any risk.

JONATHAN RUFFER: Well, I, I work on the basis that I’ve been investing in the way that we, and investing now and we were a year ago when we were, as smug as butter for 40 years and it worked. So the key I think is two fold is one to say, don’t lose your nerve, don’t. Because nobody ever says, gosh, you know, last week was so awful. I think I’m going to lose my nerves this week.

JONATHAN RUFFER: What, what happens is, is people do the exact opposite of what they know is right. But tell themselves that, that, that this is an extension. This is a variation on doing it right. And in some areas I’ve got a great imagination, but in this, I have no imagination and I can taste a turd in the champagne when there’s very little of it.

JONATHAN RUFFER: And so I sense when, there is any thinking that is different to how we have always done it. And I think the fact that our long term record has been fantastic. I mean, it, well, it, it’s ridiculous really. And, I did what I’ve always said it, but what, what I say is that, that long term performance until the end of 22 was a fluke.

JONATHAN RUFFER: In other words, you can’t juggle hand grenades and always get it right. It’s like having 29 years of outperforming an index, I think Miller did it for 15 years and then crashed. Well, we’ve done something that is probably harder than outperforming an index and we did it really without fault for a quarter of a century.

JONATHAN RUFFER: Now, that’s a fluke. That’s like finding the Atlantic Ocean as, a calm as a mill pond for a couple of years. Sure, it doesn’t happen. So my feeling is that it is corporately good for us to have a proper understanding of the risks that we take. But Grace’s book is a, you know, is, is, is, is gross.

JONATHAN RUFFER: And, if you juggle hand grenades, you know, don’t be surprised that, you know, if you, if you have a hiccup just at the wrong moment, you drop one and, it, it takes the hairs off your leg. It’s funny in my arrogant moment, Steve, I think this idea of using risk to not to lose money, which is of it in the narrow sense, is kind of intuitive.

JONATHAN RUFFER: If, if you don’t want to lose money, don’t take risk. I say we’re going to take risk, but we’re going to make our target, not losing money, which is something you can do very easily by not taking risk.

JONATHAN RUFFER: And the reason that you do this counterintuitive thing of taking risk in order not to lose money is that by definition, if you don’t lose money and you’ve taken a risk, the overwhelming amount of time, you will make money and it’s the residual that you make. I say to people that what we’re doing is saying in the market that is like a roulette table where the engineering is wonky and the croupier is drunk.

JONATHAN RUFFER: The roulette wheel being wonky means you come across a situation that is misunderstood by the marketplace. And the croupier being drunk is something where if it comes right, you will do much better than you should. So if the croupier is shouting odds of 10 to 1 on black, you know, that’s a great opportunity, but there’s still a 50% chance you lose your money.

JONATHAN RUFFER: So, so you can’t simply invest in black and say this is the best investment opportunity it’s ever seen because there’s a 50% chance you lose all your money. So the key to it is how you blend these things together. You have to understand absolutely how, how the markets are.

JONATHAN RUFFER: But it, it, it, it’s by juxtaposition that you do it. And I when I only looked after private clients, I used to say to them that they are four assets are Queen Victoria. She’s the head of the whole of the British empire, the most powerful woman in the world, but she’s also just a fat old woman.

JONATHAN RUFFER: So we need some hairy Vikings to, to, to look after her. And if you have Queen Victoria and you have a force which will protect her from all Hemings, that’s quite a good way of looking at our investments and I look at the world today and I’m deeply comfortable with the portfolio. We’ve got, I was trying to think, you know, why, why did we go?

JONATHAN RUFFER: Why did we have a bad 2023? And I think the biggest mistake we made was that we’re very long. The Yen the N I can’t offhand. In fact, more than offhand on hand. I can’t remember a better risk reward ever than the Yen is at the moment because the central bank in Tokyo is trying to keep interest rates down because the overall level of indebtedness won’t tolerate the sort of yields that there are in the rest of the world.

JONATHAN RUFFER: And because the rest of the world can see that a return of 1% on your money is less than the return of 4% arithmetic being what it is that that will simply drive the Yen lower and lower until such time as it doesn’t happen.

JONATHAN RUFFER: And one of the things that I always look out for are people who are invested in something without having any interest in why they’re invested in it. Now in the end, extraordinarily, there are two groups of huge groups of people who are in one case short of the Yen.

JONATHAN RUFFER: In the other case, not long of the Yen. And the most interesting, the more interesting of the two is the level player in America who spotted that if you want a profit in Baltimore for $50 million and that costs you 5.5%. If you borrow in Yen and a me to sell the Yen and convert it to the, to the dollar, you replace a high service cost for an F FX problem.

JONATHAN RUFFER: And he’s not interested in the Yen. It’s simply a vehicle for getting an interest rate of 1.5% rather than 5.5% you know, year on. He feels like he’s a genius because he discovers that actually he doesn’t do $50 million anymore. He has $45 million but the key is not that he is making wrong decisions.

JONATHAN RUFFER: He’s not making a decision on that at all. Now, in Japan, there are institutions who are very long of treasuries and very long of European bonds. Now, they run them in the naked currencies because although the bonds haven’t been too hot recently, they’ve made it all back on, on the currency.

JONATHAN RUFFER: Now, let’s be provocative when the crisis comes. What, why is it, why is it interesting there, institutions, you’ve been talking to Russell Napier, you say? Well, I think Russell Napier is absolutely right on the idea that financial repression is coming.

JONATHAN RUFFER: I’m hoping if I can persuade my wife to get two dogs and I’m going to call one of them financial and the other one repression and that’s going to be my forward looking statement as to what’s coming. But if you look at that in Japan, what does it mean? It, it, it Japan’s in a catch 22 because, if they don’t do anything, the Yen just falls and falls and if they put interest rates up, it kills the system.

JONATHAN RUFFER: So it looks like they’ve got nowhere to go and a financial repression, the very rich Japanese institutions will simply be told to buy bonds at the wrong price. Now to do that, they’re going to have to sell bonds that are at the right price elsewhere. And I could see the Yen doubling.

STEPHEN CLAPHAM: Oh, really? That’s interesting because I’ve got some, but maybe I don’t have enough. It’s funny because.

JONATHAN RUFFER: You never have enough when it’s right. But I tell you, if you’ve got some, you’ve got too many.

STEPHEN CLAPHAM: But the, the last two months, so this podcast will go out in February in December.

STEPHEN CLAPHAM: We had James Aiken on who’s a.

JONATHAN RUFFER: Macro come to the chef. I’m rather frightened of him actually.

STEPHEN CLAPHAM: Oh, you know him? He’s brilliant. I mean, he is, and he’s very bullish in Japan and he, he’s you know, make Japan great again is going to be the new slogan. And this month, we’ve got Grant Williams on Grant started life as a, a trader in Japanese Warrants. And so he’s always, and he’s lived in Tokyo.

STEPHEN CLAPHAM: He’s a real expert and he’s very bullied and, you know, it seems the, well, the stock exchange is telling companies if you’re creating a discount of big value, you’ve got to explain what you’re doing about it. And if you don’t consult them, there’s a huge momentum behind that trade. So I’m sure you’re right. It’s, it’s just timing, isn’t it?

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STEPHEN CLAPHAM: You, you made a couple of comments in the past about ETF S people tracking the index and obviously, if you’ve owned the S And P 500 you’ve done fantastically well. And Warren Buffett’s told you so. So it mustn’t be Right.

STEPHEN CLAPHAM: And, but you don’t lie index ETF S and I had another guest in the podcast, Richard Oldfield, of old field partners. And he likened investing in an Index to hanging on to the cocktails of a madman. Is, is that.

STEPHEN CLAPHAM: Your view as well?

JONATHAN RUFFER: Well, I quite recently read John Bogle’s book on how he started ETF S and I was very pleased to see that he was much more haphazard about it all.

JONATHAN RUFFER: You know, the idea sort of came to him gradually and III I didn’t think he really understood the significance of what he’d done.

JONATHAN RUFFER: And here’s an example that, you know, an idea that in warm months of the idea, you know, when the markets were cheap and nobody else was doing it, the aspiration was, look, if you done it your way around the investment market, why don’t you hitch a free ride on the, everybody else’s wisdom and by paying smaller fees, you’re guaranteed effectively to be in the fourth portal.

JONATHAN RUFFER: You know, you’ll never do better than that because, you know, that’s you know, all you’re really saving are the fees. So you, you, you got the median expertise at a cheaper price back then.

JONATHAN RUFFER: You couldn’t really argue with that. But what happens is exactly what happens in nature if you don’t allow winter to come on, distortions come into it.

JONATHAN RUFFER: And the idea that, you can have a magnificent seven in a, a stock market which has been created by ETF purchases, people saying, well, I just want the collected wisdom of the people who are buying the markets. You discover that what started off as wise people discerning value has become people who are wearing, you know, they’re madmen who are wearing the coats that Richard has identified as hanging on to.

JONATHAN RUFFER: So what, what, what we’ll find is that when the markets break, the S And P will absolutely lead the way down and will go on and on and on for falling.

JONATHAN RUFFER: Because what happened in February 2000 will happen again to those stocks of, but, but, but what, what will happen is the hills of ETF who have enjoyed the ride on the way up and like the Baltimore trader who’s got his Yen that he was the right side up and think they’ve been clever earning this.

JONATHAN RUFFER: They’ll certainly be blame, blaming somebody else, certainly not themselves on how much money they’ve lost compared with the active managers. Yeah.

STEPHEN CLAPHAM: No, I, I get that.

STEPHEN CLAPHAM: You once said that you don’t have that high a hit rate. You get a lot of stocks wrong, but your winners tend to be in much bigger size than your losers.

JONATHAN RUFFER: Well, why is that? And I, I thought that too, but in fact, it came to me as a rather a surprise that came to me thinking, you know, how is it that we’ve had another decent year when I’ve made so many mistakes and you’d look and, I think it had to do with, having confidence, in a judgment. So in other words that, that I would take a lot of, in, in, in, in subjective terms, speculative positions.

JONATHAN RUFFER: And, if they, went wrong, that was when I would work out whether I really believed what I thought. So, if you’re watching the chart. No, I, well, I, I, I’ve always been, I’ve got an encyclopedic knowledge of, stocks.

JONATHAN RUFFER: I, I show off here because they all think that, you know, I’m a bit part time and so I’ll start, I’ll ask them a analyst about the stock and I’ll, I’ll say, you know, what, what, what price is it trading at and they’ll give me a figure and I say I haven’t traded that price for a fortnight.

JONATHAN RUFFER: You have another, you know, would you think if, if I say you’re wrong, would you guess it’s higher or lower than the figure that you’ve mentioned? And, iiii I reckon to have most of the stocks I’m interested in within 24 hours of where it’s traded and it’s not, I didn’t learn them, I just know them.

STEPHEN CLAPHAM: There’s a natural affinity for the numbers.

JONATHAN RUFFER: And so, and I always get more interested when stocks are cheap because, you know, that there’s the only two absolute price you pay for the staff and the price you set it at. And if you buy something cheap, say even if it turns out to be cheap for a reason, at least it was cheap.

STEPHEN CLAPHAM: But I was just interested in what do you do when things go wrong when, when the stock starts going down? Because you’ve got very significant confidence in your own judgment. So you’re happy to keep averaging down or?

JONATHAN RUFFER: Well, this is an historic conversation. I would, I would average down but II I now have no, no real contribution to make to the debate on what, what, what companies would buy. I’ll sometimes come, come into sectors but IIII I leave it to, no, I was just curious.

STEPHEN CLAPHAM: This your winners tend to be bigger than your losers. I was just curious as to how that, how you arrived at that. And there must be some part of the process you used to follow when you were picking stocks that made you double up.

JONATHAN RUFFER: On the, the answer is it, it’s, it’s, it’s following stock prices. And, and so it, it, it works particularly well on companies that go on doing the same thing year after year.

JONATHAN RUFFER: I mean, you, you, you, you know that, that, that, that what I, what I’m never any good at was companies that morphed from being a dull company to a great company. They say I would have said the winners were buying things cheap and selling them at average or slightly above average price.

STEPHEN CLAPHAM: And have you ever come across people that say, oh, you should buy things and hold them forever. I’m doing a, a recording tomorrow with somebody that’s got that philosophy that you, you did. You buy the stock and you hold it forever and the winners will naturally grow and the losers will become a smaller part of the portfolio. And you don’t, you just don’t worry about it. You look back in.

JONATHAN RUFFER: 10 years, but you do want to be doing that after a 40 year bull market justified. You say say, you know that that’s why it looks smart is because you’re actually on the jet on an up escalator, say, say, say time rather, you know, di di his, his book, I I, one of the questions I ask people is I say 1900 to 2000 stock markets went up 200 fold in real terms.

JONATHAN RUFFER: Where do you think it was at the halfway stage? You know how, how much in that journey from, from 1 to 200? Where do you think you were in 1950? They’ll ask you, where do you think it was in? Oh, this is.

STEPHEN CLAPHAM: Unfair because I’m the one who asked the question. So I’ve got to respond to that.

JONATHAN RUFFER: The, the, the, the it switched on for the a in in.

STEPHEN CLAPHAM: 1950 it hadn’t yet reached the point that it had fallen from 1929. So it wouldn’t be anywhere near halfway.

JONATHAN RUFFER: It was four.

JONATHAN RUFFER: So, in other words, it, it went from 1 to 4 in 50 years and from, 4 to 200 in, in, in, in the previous 50 years. And what, what’s the difference for leverage is, is, is, is the answer to that.

JONATHAN RUFFER: But, you know, a lot of people think, well, of course, you know, the second, you know, the, the two world wars of course, must have made the, the, the, the first half less attractive. Well, now that might be true in Europe, but in America, the wars were, were, were hugely beneficial.

JONATHAN RUFFER: So in other words, even with the, and the interesting thing was that the charts II, I haven’t got them but I kept them in my mind, but it’s amazing how similar, all the charts were.

STEPHEN CLAPHAM: You know, it’s not like the S And P is now, which is a quite different chart, the others, do you think that is sustainable or do you think the, the previous pattern where all the markets follow the same pattern is more a good question?

JONATHAN RUFFER: Well, funny enough, you know, it’s great that you’ve asked me a question where II, I haven’t got a set answer but if I’m right about Degla, then, I think there will be a tendency for them to disperse.

STEPHEN CLAPHAM: Well, they’ve already dispersed. So the, you know, the hope is that they always start converging again.

JONATHAN RUFFER: But, you know, when I, when I started in, you know, back in the market in 1979 that what the macro guys were doing was geographical. So, you know, the question was, how much did you want in America? How much did you want in, in Japan? And, and once the thing had globalized, that wasn’t an interesting question anymore because it didn’t really matter whether the thing was headquartered in Frankfurt or in London or in Tokyo.

JONATHAN RUFFER: And one of the things I learned in those days was that the interesting question with the macro was what weight they gave Europe because back in the seventies, the European equity markets were really undeveloped. They were much so small. Yeah, they, they’re quite small and there were two funds which always jostled for last place, which had European funds.

JONATHAN RUFFER: So, you know, you, you couldn’t make any money in, in, in Europe. And what I noticed was that, that, you know, on one occasion they had 52% while one guy had 52% in Europe. And what I spotted was that he wasn’t giving Europe a thought. And what he was doing was that he had 34% in America and he was bearish America.

JONATHAN RUFFER: So he’d bring that back to 28 and he’s had 17 in the UK was bearish at the UK. He brought that back to 11 and when he’d added them all up, it, it, it had only got to 48%. So Europe had to be 52 to get to 100. So in other words, when they were bullish, Europe became almost nothing. And when, when they were bearish, I used it not as the answer to the question they were trying to answer. But to the over.

STEPHEN CLAPHAM: Now listen, you once said nobody needs more than £20 million. And as a consequence of that, you applied a lot of effort to your phone, throop it, endeavors.

STEPHEN CLAPHAM: You were brought up in the northeast. You’ve saved the old masters in the Upland Castle and you bought the castle and injected a lot of money into the surrounding area. You talk about wealth and why you’ve done this.

JONATHAN RUFFER: Well, first, I think a word that really makes one want to vomit is philanthropy. To me. Phil philanthropy is what Mexican bandits to after they become presidents.

JONATHAN RUFFER: So it, it, it’s what you say about yourself when you need a, a makeover. Ii, I haven’t really got an alternative word. I call it do goody because there’s a sort of element of cynicism in that which like I just noticed that, I mean, in the world that you and I live in, we meet lots of extraordinarily rich people and it’s rather like aging, you can age in different ways.

JONATHAN RUFFER: Some people get very shiny faces, some people get very wrinkly faces. Some people, dribble, some people sing but it’s always a move from being somewhat good looking to somewhat bad looking. And it seems to me the effect that money has on people.

JONATHAN RUFFER: You know, there are any number of ways. It makes some people arrogant, it makes some people fearful, it makes some people preoccupied and it just seemed to me that was a, I didn’t want that say I treat myself like a well, I treat what I do. I regard as a drain pipe.

JONATHAN RUFFER: It comes in the top head and then pulls out the bottoms. I take it a good at the thought and the £20 million where did that come from? I had some II, I said it in some article, there was a, I tell you who it was, it was a chap called William Rathburn the fourth. The Rathburn were, Quaker do-gooder in Liverpool.

JONATHAN RUFFER: I mean, Rathburn, the organization, is where they made money. They were, they were traders, they never became bankers. So they did exactly what merchant bankers do, but they were simply merchants.

JONATHAN RUFFER: 70% of the tea that came to England in the 18 forties was handled by Rathbun and William Rathburn the fourth said, no man should have more than 200,000 after that so that he’ll go wrong. And I think I, I simply changed the number of notes on what William Rathburn, the former has running.

STEPHEN CLAPHAM: And you, you’re from the northeast. You know, I live part of the time in, in the northeast.

JONATHAN RUFFER: I’m half and half, half an hour. I’m like Ben Hur, I have two Bloombergs. I have one up there one time.

STEPHEN CLAPHAM: How funny. And the, the firm has been incredibly successful. It’s got, what, about $30 billion under management?

JONATHAN RUFFER: It’s in the, it’s the 35 from that.

STEPHEN CLAPHAM: What has made it so successful? Was it you, was it the performance? And what, what is it.

STEPHEN CLAPHAM: What has been your secret?

STEPHEN CLAPHAM: Is it doing this very unconventional approach you’ve taken?

JONATHAN RUFFER: I, I think it’s a number of things but it basically the people the, the, the, the, the hero of this place is Henry Maxi who joined me in 1998 as a squid dog.

JONATHAN RUFFER: I mean, he got an imply high first in economics from from Oxford. But, you know, we quite quickly got over laughing at that and I remember we worked closely together and if I did anything good, it was holding him because he could have really taken any job he wanted after a couple of years.

JONATHAN RUFFER: But we came together for a meeting in early 2003 and we were both bubbling over with something and we were both transpired, bubbling over with the same thing that we thought that Japan was going to take off and we absolutely worked ourselves up into a frenzy over it.

JONATHAN RUFFER: And, you know, we didn’t have very much money and fidelity Japan, which was the big investment trust was trading at a 20% discount and we hit it and, and we got something like 15% of the company quite quickly was that, and, and I mean, you know, this was, many tens of millions, which was for us a really a very big deal at the time.

JONATHAN RUFFER: And almost immediately the, you know, Japan took off. And so Henry, I, you know, that was the start of us working together. Now, Henry has built up a team here and the technical knowledge we have here is absolutely frighteningly absolute.

JONATHAN RUFFER: And I call these clever clogs people who know everything about nothing. Now, I’m a, the other extreme I knew nothing about everything and the key is to have these two different ways of being playing together.

JONATHAN RUFFER: So the natural thing is to be like a couple of two year olds in the same play, they might appear to be playing together, but they’re actually just doing their own thing. But when one can latch the two thoughts into one another, which is real oil and water stuff because, you know, the stuff I’m interested in.

JONATHAN RUFFER: I mean, II, I don’t think I have ever read a central banker report. I, I do, I haven’t got it for you. But I, one thing I carry around with me just because it was so excellent was a letter in the FT. Yes, I I’ve got it. How pleasing written by JK Gel.

JONATHAN RUFFER: It’s a quotation of, of JK Gal Grace. In his book called The Economics of Innocent Fraud 2004. Since the US Federal Reserve was founded in 1913. It has had a record against inflation and notably against recession of deep and unrelieved in consequence.

JONATHAN RUFFER: That that seems to me absolutely to sum it up. So if my attitude was why bother. But I mean, I’d be jo cross if the clever clos tried to take that line. But for me, I get strange from not having a clue what what they’re saying, what the forecasts of, unemployment are going to be, what the earning, whether we’re going for a soft landing and no landing.

JONATHAN RUFFER: I regard it as to all intents and purposes unknowable. Either you do it absolutely with looking as far forward, which is no distance at all, to be ahead of everybody else by the disciplines that they produce or you’re doing what I do, which is to look over the horizon and to look in, in the middle ground, what’s going to happen in six months time, there’s a killing ground, a killing.

STEPHEN CLAPHAM: Ground that is a brilliant place for us to finish. But I always like, I always like to ask people if they’d like to recommend a book to a young person thinking about coming into the industry. Yeah, and we’re in a.

STEPHEN CLAPHAM: Fantastic room surrounded by books.

STEPHEN CLAPHAM: Sadly, not one of mine, what would you recommend to someone?

JONATHAN RUFFER: The book that I would recommend to the Nerd from a nerd would be Sydney Homer’s History of interest rates.

JONATHAN RUFFER: And the key to it is to get the 1963 edition because the 1977 edition, he had been badly caught out because he’d made no reference to a coming inflation. And by 1977 he’d rewritten it in the light of what had happened. But in the 1963 it’s written absolutely in the inner of how the world felt before that episode happened.

JONATHAN RUFFER: Now, that’s a book to match the 1937 Stock Exchange Year book for Fascination. I don’t think I’ve got any wisdom for what a starting book should be. There are lots of good books around, but I would go for one which was not aimed at the person who was interested in making money.

JONATHAN RUFFER: You know, a lot of people in our industry, they, they very hopeful that they’ll make money for their clients. But what they’re really interested in doing is making money for certain. And I’m very truck here that we don’t have culture of being interested in making money for ourselves.

JONATHAN RUFFER: And I was always useless at chatting up girls when I was young because I tried too hard. But what I noticed was the people who were good at it were the people who really were just themselves and didn’t try to impress. And that was a much more successful scene. And I, I would have said what I didn’t learn with pretty girls. I have learned joining.

STEPHEN CLAPHAM: It’s been such fun talking to you. Thank you so much.

JONATHAN RUFFER: See you in the th Thank you.

STEPHEN CLAPHAM: Well, what can I say? Jonathan Ruffer is the type of investor. I love talking to thoughtful wise and not afraid to be controversial.

STEPHEN CLAPHAM: And how would you prepare for a question? Like the one he posed to me, Ruffer is one of my training clients and I can tell you they have some super smart people and I recommend that you also take a look at the video version of this podcast on YouTube because we filmed it in their library meeting room.

STEPHEN CLAPHAM: And honestly, it is really worth seeing as ever. If you enjoyed this episode, please tell all your friends and that five star rating on Apple podcast or Spotify. It really helps. Thanks as ever for your support.