#45 – The Chess Master

HOW STEVE KNOWS THE GUEST

Gladstone is a training client of Behind the Balance Sheet but Steve first met George at a small private conference where George took Q&A, and Steve asked him to come on the podcast. It says quite a lot about the Gladstone setup that the analysts themselves took the initiative to organise their own training without the CIO getting involved.

Contents

00:02 – Investing insights and strategies
14:09 – Market positioning and risk
27:11 – European market dynamics explained
39:09 – Accounting issues in investing
46:60 – AI’s role in investing
58:10 – Management insights and analysis
01:08:21 – Learning from investment mistakes

Transcript

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. Our goal is to inform, educate and entertain. We hope you enjoy this and every episode.

Behind the balance sheet and affiliates and podcast guests may own shares or have an economic interest in securities discussed in this podcast, which is aired for your education and entertainment only. Nothing in this podcast should be construed as investment advice or relied upon for investment decisions. Always do your own research.

STEPHEN CLAPHAM: As someone who spent many years analysing companies and digging into financials, I know how critical it is to have the right tools for research. That’s why I want to tell you about AlphaSense, the market intelligence platform trusted by 75% of the world’s top hedge funds and 85% of the S&P 100. OfficeSense is designed to make research faster, smarter, and more comprehensive. Its AI-driven technology gives you access to over 450 million premium sources, everything from company filings and broker research to news and trade journals.

STEPHEN CLAPHAM: And for private market insights, it’s unmatched. With their acquisition of Tegas, Office Sense now includes the largest library of expert transcripts in the world, over 150,000 from 24,000-plus public and private companies, and that’s growing at the rate of 5,000 to 6,000 transcripts per month. This is a platform built for serious investors, giving you the power to uncover opportunities, spot risks, and make high conviction decisions with confidence.

STEPHEN CLAPHAM: If you’re ready to elevate your research, visit alpha-sense.com forward slash BTBS, that’s alpha A-L-P-H-A, hyphen sense.com forward slash BTBS for behind the balance sheet, and see how Alpha Sense can transform the way you work. It’s a tool I highly recommend.

STEPHEN CLAPHAM: My guest, George Michalakis, in his youth was one of the top three under 20 chess players in the world. No surprise, he’s pretty good at investing too. He runs a London-based $2 billion long-short equity hedge fund that he founded in 2006. Since then, he has turned $100 into $535 versus $343 for the MSCI world. That’s using a net exposure of 30-45%, which is pretty impressive.

STEPHEN CLAPHAM: Even more surprising is that he entered his longest running short position not 10 months ago, but 10 years ago. We talked about his investing philosophy, his theory about a lifestyle recession, why shorting is critical to performance. How he manages the fund and the team, why he focuses on management, and much, much more.

STEPHEN CLAPHAM: Some of George’s insights come, I think, from having a different perspective on the world. We talked, for example, about why seven Formula One drivers are under 23, because they’re learning on simulators, and what this means for investing. Man plus machine was extremely powerful in chess, which George reckons is 20 years ahead of investing.

STEPHEN CLAPHAM: And he shares some of what he’s doing at Gladstone and how the role of an equity analyst will change. George clearly has an incredible brain. And obviously, I was always going to struggle to keep up. But we had a fascinating conversation. Well, I was fascinated and I’m sure you will be too.

STEPHEN CLAPHAM: So, George, I’m really interested to talk to you because you’re a chess international master. But what was behind the move to investing? Did you always want to be an investor?

GEORGE MICHELAKIS: I think I always wanted to be in finance. I grew up in a time where that seemed intriguing. And once I started in finance, I realized that I didn’t want to be in finance and thought. Well, what’s close enough and started in private equity. Right. And found that this was back in the late 90s.

STEPHEN CLAPHAM: So when it was still fledgling.

GEORGE MICHELAKIS: Yes. Found the process interesting.

GEORGE MICHELAKIS: Found the people who runs these companies, how did they get to where they got to, why they’re for sale. All of the dimensions just intrigued me. Yeah. And so that was my start in the investment business. And I think at that time, it was somewhat of an offshoot from the world of finance. It was typically people who had come out of investment banks started all the private equity firms. So that was my way into the business.

STEPHEN CLAPHAM: But why did you move to public equities?

GEORGE MICHELAKIS: So I met some hedge funds in 2003. And I think the energy, the intellectual flexibility of it all, the depth of conception, it was far less. Checking that the cash flow number is really 200 and far more understanding where an asset fits into the world.

GEORGE MICHELAKIS: And I think all those dimensions were new to me and very interesting. I think more intellectually challenging. And so a little less about the diligence and the process and quickly got intrigued by the short side. So all of a sudden you’ve got this new tool that you can use.

GEORGE MICHELAKIS: Where private equity is actually, interestingly, a good training ground because you talk to a lot of companies, you check a lot of the detail behind those companies, you check whether what they say is true and whether it matches financially. You understand business models.

GEORGE MICHELAKIS: You understand how business models can go wrong because you’re owning assets for the long term. And these are a lot of the things that public market investors don’t spend their time on. Not that they couldn’t, it’s just you tend to be more worried about, is this in the right sector?

GEORGE MICHELAKIS: Is the next earnings per share up or down? And is the market going to like the fact that the balance sheet’s getting more or less levered? So the focus tends to be more on the narrative and less on diligencing whether what’s being said.

STEPHEN CLAPHAM: Is going to be true it’s funny because i do this forensic accounting course and the slogans numbers over narrative right the private equity is much more about the numbers and and much less about the narrative because they figure i guess they figure that the narrative the numbers will take care of the narrative i.

GEORGE MICHELAKIS: Think they’re owning the asset for so long that the bet is that at some point there will be a narrative yeah which is why we end up with companies with three years of good financials. And if you somehow have a sense of what happened before those three years, it’s often much messier.

GEORGE MICHELAKIS: And so I think there’s this patience, timing your exit, waiting for enough of the environment to be supportive and the management team to be on a good run in terms of execution, and then you can sell assets. But I think there’s… As long as you can get that opportunity in the next five, seven, nine years, I think some of these investments are being held for longer and longer.

STEPHEN CLAPHAM: Well, they’re being held for longer and longer because they can’t get rid of them.

GEORGE MICHELAKIS: Well, they turned out to be less interesting assets.

STEPHEN CLAPHAM: Yeah. Well, of course, there are much more crowded field now. And your fund, the Lasker Fund, is named after the former world chess champion, Emmanuel Lasker. Now, I want to ask you, why him? We’re going to come on to more chess in a bit. Why him and not, say, Kasparov? Lasker apparently was considered one of the greatest chess players of all time.

STEPHEN CLAPHAM: But is chess an activity in which we can improve? I’m interested in this because, you know, if you think nobody would run a four-minute mile until Roger Bannister, and now 1,750 people run it, we improve over time. Do chess players improve over time? And why was it Immanuel Lasker you named your fund after?

GEORGE MICHELAKIS: Lasker, I wanted something with more duration. So he was the longest world champion.

STEPHEN CLAPHAM: Oh, I see.

GEORGE MICHELAKIS: Okay. And so that was sort of as opposed to a style or a brand.

GEORGE MICHELAKIS: And then, I mean, certainly chess players, are they getting better?

GEORGE MICHELAKIS: I think they’re changing because of the nature of technology. Right. There’s more of them. They’re younger.

GEORGE MICHELAKIS: They’re learning in different ways. So they’re not learning the old Soviet school training camps and then some sort of super experienced world-class player trains you for weeks and they’re doing it online, playing games.

GEORGE MICHELAKIS: Just volume of repetitions. So there’s some interesting learnings from all of that. I think my thesis is that the chess world is 20 years ahead of the investing world in terms of how… That humans have integrated with technology.

STEPHEN CLAPHAM: All right, well, we’ll talk about that later. We’re going to come back to that, because I was interested, you were talking about how many Formula One drivers are now under 23, because they’re learning in a different way. So let’s come back to that, because I think it’s really fascinating.

STEPHEN CLAPHAM: But I want to talk about the fund and your investment objectives generate consistent risk-adjusted absolute returns across equity market environments with a typical net exposure range of 30 to 45%. And you use a fundamental… Research approach to identify structurally value-creating and value-destructive companies and industries.

STEPHEN CLAPHAM: And you focus on seven factors that identify long and short investments. What are the most important factors in that cocktail of the seven? Let me read the seven for the listeners. Governance, industry structure evolution, structural change, corporate change, balance sheet structure, capital allocation, and returns in capital.

GEORGE MICHELAKIS: What do you really worry about?

STEPHEN CLAPHAM: I know you worry about it.

GEORGE MICHELAKIS: I mean, if there was one that I think is always relevant, because I think at certain times in the cycle, different things will be relevant. During the GFC, balance sheet and capital structure was the most important. It didn’t matter really who you were. But I think the most important is governance. Interesting. As in a permanent feature that permeates. Decision-making all the time. And it’s something so subtle.

GEORGE MICHELAKIS: Are these people making the right decisions, hiring the right people, running the business better every day as opposed to worse? And these are quite invisible to the eye.

STEPHEN CLAPHAM: So how do you evaluate that?

GEORGE MICHELAKIS: Meeting management from time to time, checking their track record, the firms now that assess management, making sense of their decisions and trying to really understand whether the decisions are what I would do.

GEORGE MICHELAKIS: I think that’s a great acid test. Would I be doing that? And why are they doing that? And so a little bit, I think. In terms of training people, one of the hard things to do is to get them to think, what would you be doing if you were them?

STEPHEN CLAPHAM: But most people wouldn’t have a clue.

GEORGE MICHELAKIS: That’s true, but it’s something you can learn. You can start to think more like the manager of a company and understand more what really they should be doing.

STEPHEN CLAPHAM: But that requires quite a detailed understanding both of the business and of the industry, doesn’t it?

GEORGE MICHELAKIS: It’s Can do. I mean, we don’t do anything in commodities, but I would struggle to understand what a steel company should do, yes.

GEORGE MICHELAKIS: But if they’re in the sectors that we’ve tended to focus on, I can make sense broadly of whether somebody’s doing something that adds up or has a realistic probability of adding value as opposed to… They ran out of ideas or, I mean, the worst case example, I’ve seen a CEO buy a company in Australia.

GEORGE MICHELAKIS: I won’t mention the company, so that he can move his family there. So how’s that for a great rationale for doing a transaction? So there’s all kinds of things that happen in the corporate world and just making sure that you’re in the right quartile of stewards of capital slash they’re looking off, they’re aligned with the shareholders as opposed to the bottom quartile where, okay, it’s a professionally hired team.

GEORGE MICHELAKIS: Maybe this is their first shot at actually running a public company and their incentives are not what you think they are or they’re not what they should be.

STEPHEN CLAPHAM: That guy that bought the business in Australia, he didn’t tell you that he wanted to move there and he wanted to move his family there, surely.

GEORGE MICHELAKIS: There was always something. Strange about the timing, the asset they bought, the reasoning. It never really resonated good industrial logic.

STEPHEN CLAPHAM: So you’ve been doing this for 20 years, which is pretty unusual for a hedge fund. And you’ve compounded at 10% market neutral, which I think is astonishing. To the end of 2024, you delivered a 5.35 times return versus 3.43 times for the MSCI world.

STEPHEN CLAPHAM: You’re not on any magazine covers or anything have you been keeping a low profile is that you prefer and what’s been the secret behind that yeah well let’s ask let’s start with the latter question because that’s an easier one look.

GEORGE MICHELAKIS: It’s back to buying great companies at the right time and the time point everybody talks about buying great companies because that’s an easy thing to talk about yeah yeah and the skill part the skill component is more the timing when when to earn them which is something that’s far less explainable and so a little bit people struggle with that yeah a lot of good books written about what is a good company and less books written on when to buy a good company.

STEPHEN CLAPHAM: But don’t you just buy them when they’re cheap?

GEORGE MICHELAKIS: Well, the question often is, has the company actually been impaired? Or is the market cheap? In which case, is there alpha?

GEORGE MICHELAKIS: It’s a little more nuanced than just buy them when they’re cheap.

GEORGE MICHELAKIS: And often cheapness is normally a good reason for that. There’s something that needs to change or some perception that needs to really alter. So getting ahead of that change in perception, I think, is really where the returns are made. I think one of my team described it well. He said, we’re in the business of buying and selling assets that are changing class.

GEORGE MICHELAKIS: The long should be getting upgraded in their class, and the short should be getting downgraded in their class. And that’s what we aim to do.

STEPHEN CLAPHAM: That’s quite tricky, isn’t it? Because that requires understanding the business and understanding the market perception.

GEORGE MICHELAKIS: Correct. That is the challenge. And I think most people are good at one or the other.

STEPHEN CLAPHAM: Yeah.

GEORGE MICHELAKIS: And it’s very rare to get people to think in terms of both at the same time. I have a sort of evolving hypothesis or thesis, let’s say, around the human brain. We have two brains, essentially, a left brain and a right brain. Yeah. And they do different things. And most people tend to lean very heavily on one or the other.

GEORGE MICHELAKIS: The 80s, 90s version of that was the left brain’s the logical side and the right brain’s the creative side. It’s far more complex than that. And there’s actually been a lot of study around it. But there are truly two brains. And most people tend to be very overweight, one. Back to…

STEPHEN CLAPHAM: But you must be a very overrated one as a chess player, no?

GEORGE MICHELAKIS: Well, even chess players, I think you have different types. So they’re not all acting more like computers. Some are more feely and have a sense of what’s going to work better.

GEORGE MICHELAKIS: So I think that’s, even there, there’s the case of using both. You need to be able to calculate and have a positional sense.

GEORGE MICHELAKIS: Which is a bit like the market. The positional sense is, do I even want to be in this neighborhood? Yes. And the calculation is, is it cheap, are the numbers going up, etc.?

STEPHEN CLAPHAM: No, I’ve always thought that being an analyst in particular is a very creative job. And my wife laughs at me when I say something like that. It’s just about the numbers. But actually, the really good ideas are about the perspective and looking at things differently.

GEORGE MICHELAKIS: Through a different lens and that’s by the way so just to come back to the left brain right brain they do it’s it’s a it’s a case of they view the world differently yeah so the left brain will see things in a very specific way yeah and the right brain will see things in a very specific way and then the market can get things wrong when it tends to focus too much on i don’t know very near term numbers.

GEORGE MICHELAKIS: Yeah. Or falls in love with a big picture theme and then misses that the company’s misexecuting in the detail.

STEPHEN CLAPHAM: Yeah. No, no, I completely get what you’re saying. So just talk about how you do it, the mechanics of doing it. You’ve got sort of 25 longs and 50 shorts sort of thing and 120% long and 80% short. So you’ve got big chunky longs, 4 or 5% I’m guessing and 2% in a short. And is that about right? And why is that the best framework? I mean, you’ve just done this by trial and error or experience over the years. Has it changed much?

GEORGE MICHELAKIS: It has evolved. And we’ve spent a lot of time looking at our data. So to understand sizing, optimal portfolio construction, we run an optimizer that took us a number of years to build, which helps define sort of where your alpha capture and your wallet.

STEPHEN CLAPHAM: Is that about sizing?

GEORGE MICHELAKIS: It’s, yes, mainly about sizing. And I think again the market can get very lopsided in how it’s constructed its portfolios and then when things change suddenly you get everybody’s going to feel the pain yeah it’s a question of how much pain are you going to take so what sort of drawdown risk are you running it’s a lot lot of data and a lot of analysis of that data. On the long side, I feel…

GEORGE MICHELAKIS: Really owning the things you want to own in size is a much better way forward than a 50 stock 3% positions type of portfolio. So one of the acid tests is that can see why they might be long. Are we going to be able to own 5% of the fund in that? If the answer is no, it’s typically something in the way. And again, you’re playing probabilities.

GEORGE MICHELAKIS: This is all a probability matrix. So over time, maybe that’s a good investment today, probabilistically, but maybe the probabilities aren’t high enough. Either the tail whisk is too high. And so we’re always looking to, if I can put 5% of my fund in it, then I know it’s ticking a lot more boxes than what would only be a 3% position.

STEPHEN CLAPHAM: You must be able to run much more than 5% if you’ve only got 25 longs, right?

GEORGE MICHELAKIS: Yes, but I’m using that as the hurdle.

STEPHEN CLAPHAM: So how much would you have in a long before you went, oh, that’s too….

GEORGE MICHELAKIS: We would be happy to go up to 10%, but that’ll typically be truly boring companies. There’s something. Quite permanent about those types of companies.

GEORGE MICHELAKIS: We’re not trying to buy 10% in a company whose earnings could vary dramatically.

STEPHEN CLAPHAM: Nothing too exciting.

GEORGE MICHELAKIS: Yes.

STEPHEN CLAPHAM: And you said you need eight people, because you need to generate a short idea every week and a long every three weeks. Is that kind of the price of entry to the long-short world these days? Because you need an eight- to ten-man research team. It’s a big commitment, right?

GEORGE MICHELAKIS: I think if you’re going to run 200 gross, which my belief is you should, and you’re going to run a full short book, which my belief is you should, and then you need to be able to organize that team. It’s how much authority, how much accountability, how often do you meet with them, when do you review positions.

GEORGE MICHELAKIS: There’s all kinds of checks and balances that need to be incorporated. If you’re doing something, a twist on that, let’s say, which may have a place in the world, I don’t know, then you can do it with a smaller team. I think if you’re running a long, biased, very concentrated, long work, you could probably do that with four people, a PM plus four.

STEPHEN CLAPHAM: You need the numbers because of the shorts. So do you organize a team into long analysts and short analysts? I don’t know.

GEORGE MICHELAKIS: I suspect that era is a little bit probably going to move beyond that era of thinking. Again, gut feel. My sense is a lot of the process that short specialists sort of made their own can… Is very process oriented, i. e. Will lend itself to technology disruption.

STEPHEN CLAPHAM: Okay.

GEORGE MICHELAKIS: And rather what you should have is generalists who can embrace the technology and train them to be both left-brained and right-brained. So I find, coming back full circle to what I was saying earlier, the short-minded people are very left-brained, very process intensive.

GEORGE MICHELAKIS: Whereas the right brain is I want to own this company because it’s the right place in the right time and it’s a good company and maybe it’ll become a great company. So a different way of thinking.

STEPHEN CLAPHAM: It’s funny because when I started in the hedge fund world I don’t think there was this idea of having a short team and a long team. And so I did both longs and shorts and was probably equally bad at both. I don’t know. And I find that helpful because, you know, when you’re out in the world, you see things that you would like to own and you see things that you think I wouldn’t own that in a million years.

STEPHEN CLAPHAM: And if you if you’re in a long only fund, you see many more short sector funds. So, you know, I think that it’s natural. But then talking to people that have got short focused analysts, they found that to be very beneficial because the short guys have got those processes of finding the red flags and so on. And I’m quite surprised because I think that the world’s going more in the short specialist way.

GEORGE MICHELAKIS: I think what we’re talking about is simply, do you have a culture for shorting? And a lot of people who, again, are right-brained, have a tendency to be better on the long side, simply lack the culture for it. And then they sort of buy that culture, in a sense, by hiring the expertise. I think the future is integrating both, which is not straightforward.

STEPHEN CLAPHAM: Well, we’ll come back to that because I want to talk about an AI world. Let’s talk about Europe, because you mainly invest in English-speaking markets. You’re 60 to 70% Europe, and the rest sort of US and other English-speaking countries.

STEPHEN CLAPHAM: And I read in your letter, you mentioned the 30 largest companies in Europe broadly kept pace with S&P 500 over, maybe not the last few, but over the last 10 or so years, which surprised me. And you’re very bullish in the alpha spread in Europe. So can you just talk about that? Because it’s not something that people are familiar with.

GEORGE MICHELAKIS: Right. Which part is the…

STEPHEN CLAPHAM: The offer spread. Right. And the fact that the large caps in Europe have done pretty well.

GEORGE MICHELAKIS: Well, one of the things I learned is that in Japan, when the Japanese markets were all over the show, there were actually good market neutral type funds that actually did really well through the 90s. Oh, really? Yeah. And that surprised me.

GEORGE MICHELAKIS: But on reflection, if you can truly become agnostic to the beta, there were probably, as a hangover of the roaring 80s, there were probably lots of reasonable companies to own, but also lots of over-levered, domestic-facing, problematic companies. If we look at what’s happened in Europe over the last… 15 years, and I think we need to recognize that the last four weeks have actually seen a dramatic change in that.

GEORGE MICHELAKIS: But if you look 15 years since the sovereign crisis, really European domestic has been a mess. Exporters have done well. And so that’s provided a pretty clear playbook in that 15-year period, which seemingly has ended, as to how to capitalize on that from an alpha perspective.

GEORGE MICHELAKIS: Own the businesses that have global product appeal, will earn dollars. Have Euro cost bases and short companies that still face a pretty sluggish domestic economy. That’s been changed somehow over the last few weeks or even maybe the last year or two, maybe the last year.

GEORGE MICHELAKIS: I think we’re seeing the result of that or the culmination of that change in the last few weeks where it now seems that European domestic is actually investable. Maybe not the consumer, maybe even the consumer might be investable. And the export companies are being challenged by the Chinese.

GEORGE MICHELAKIS: I think what I’ve found in Europe is a very big dispersion in terms of the quality of the governance, the really well-run private family-owned businesses, for example, or companies that have got a tradition of creating value, tend to just do better than… The Paris Staples and these quasi-government companies and some of the small caps, I think, have essentially been run into the ground over time.

STEPHEN CLAPHAM: If you enjoy this podcast, you’re bound to enjoy our free newsletter on Substack. It’s a weekly email on interesting investing topics. Visit BehindTheBalanceSheet. Com and hit the sign-up button. While you’re there, you might want to check out our brilliant online investor training school.

STEPHEN CLAPHAM: Hundreds of students have taken our flagship Analyst Academy course, which teaches you everything you need to become a serious equity investor. And if you’re a professional investor, we run a forensic accounting course for institutional clients and soon a cohort-based course for serious amateurs. Email us at info at BehindTheBalanceSheet. Com.

STEPHEN CLAPHAM: As someone who spent so many years analyzing companies and digging into financials, I know how critical it is to have the right tools for research. That’s why I want to tell you about AlphaSense. The market intelligence platform trusted by 75% of the world’s top hedge funds and 85% of the S&P 100.

STEPHEN CLAPHAM: AlphaSense is designed to make research faster, smarter, and more comprehensive. Its AI-driven technology gives you access to over 450 million premium sources, everything from company filings and broker research to news and trade journals. And for private market insights, it’s unmatched.

STEPHEN CLAPHAM: With their acquisition of Tegas, AlphaSense now includes the largest library of expert transcripts in the world, over 150,000 from over 24,000 companies. And it’s not just quoted companies. Did you know that 75% of all private market expert transcripts are on AlphaSense? And it’s also the go-to for 50% of MidasList VC firms when conducting expert calls.

STEPHEN CLAPHAM: This is a platform built for serious investors, giving you the power to uncover opportunities, spot risks, and make high-conviction decisions with confidence. If you’re ready to elevate your research, visit alpha-sense.com forward slash BTBS and see how AlphaSense can transform the way you work. It’s a tool I highly recommend.

STEPHEN CLAPHAM: And you’ve got sub-portfolios along sector lines or themes, and you’ve got one long and two, three or four shorts. How do you structure it and why do you do it this way?

GEORGE MICHELAKIS: I think it keeps you intellectually focused on what you’re saying through your portfolio and means tracking whether that theme is really playing out. Makes it clear whether that’s true or not.

STEPHEN CLAPHAM: So can you give us an example of when you say a theme playing out, what sort of theme would that be?

GEORGE MICHELAKIS: Well, on the short side today, we’re short. We think the consumers in what I’m calling a lifestyle recession, where basically people are finding it just harder and harder to afford the life that they had before, and they’re adjusting their spending patterns to reflect that.

GEORGE MICHELAKIS: And so we’re short companies that have taken too much price, through the covert period where all the free money was given to people to stay at home and have products and services that maybe the consumer doesn’t actually need i’m trying to be long business companies that actually offer value for money for example.

STEPHEN CLAPHAM: So you’re long a Ferrari.

GEORGE MICHELAKIS: Yes. Well, value for money in that case. It’s a different idea. But I think a Ferrari is a… I think… Let’s sit back till we can talk about luxury. It seems to us that the idea of mass luxury is gone. But the one thing that’s still alive is status. Yeah. And so just… Again, the theme has changed subtly. Whereas…

STEPHEN CLAPHAM: Before the consumer just wanted to be part of the luxury world i think what the one thing that’s permanent is the idea of status do you not worry about the valuation of a stock like Ferrari i mean i i don’t mean to pick on that stock but it’s a stock that i i find quite fascinating i would find it very difficult to buy Ferrari tomorrow right this sort of i don’t know what it is but i know it’s a big number right because i think Ferrari this is an existential threat because though everybody wants the car keys the the product is undergoing a dynamic change because we don’t really know what an electric Ferrari will offer over an electric Tesla other than the other than the name and in the past it’s had a lot going for it because it’s had a very distinctive look and it had a very distinctive sound.

GEORGE MICHELAKIS: And it’s had a very distinctive performance and all of those three things i think are might change in that in an all-electric world it’s interesting because i empathize with that perspective and we’re actually short Porsche on precisely that idea okay the difference being that there’s 300 000 cayennes yeah right and that box of a car which clearly was super popular for 15 years, is very easy to replicate, both in terms of the look and, by the way, most of the components are probably being made somewhere in Asia.

STEPHEN CLAPHAM: No, absolutely, but you don’t have the badge.

GEORGE MICHELAKIS: The difference being Ferrari makes 14,000 cars. Yeah. There’s a club. There’s a waiting list. To get one of the special Ferraris, you need to be a repeat buyer. It’s more of a club membership and it truly offers status. I think your argument, which I’m in agreement with, which is that the EV form factor essentially will… Make everything seem the same.

STEPHEN CLAPHAM: Yeah, well, I know it’s funny because when Luca was in charge, 3,000 was the kind of thought of as the ceiling for production. We’re now four times that. And presumably, you know, they could go even higher. I mean, we don’t know. But I don’t want to go into the detail of that because it’s…

STEPHEN CLAPHAM: It’s probably a conversation that I’d love to have with you once we’ve stopped recording. But on the themes, you make money in almost all of these themes or sectors or geographies. Is it very important to you to have each unit being profitable?

GEORGE MICHELAKIS: Yes.

STEPHEN CLAPHAM: Why is that?

GEORGE MICHELAKIS: Because…

GEORGE MICHELAKIS: If you think of the portfolio from a kind of buckets of long and some shorts, but somehow they’re standalone, why would I want any one of those to not be profitable? Now, the way I think about it is, if the majority are profitable in a given year, our slugging rate, i. e.

GEORGE MICHELAKIS: How much you win when you win versus how much you’re losing when you lose is also very high. And so I just need 50 plus percent of those buckets to pay off and then to get the slugging rate to do what it’s done historically, which is to really capture the wins when you’re right and minimize the losses when you’re wrong.

STEPHEN CLAPHAM: It’s much higher than 50%, isn’t it?

GEORGE MICHELAKIS: Yes, but I’m saying… You can have a pretty reasonable year just getting it 50-50. But I’m watching very carefully to make sure those themes are playing out as expected. And if they’re not, I don’t need to be right.

GEORGE MICHELAKIS: And I think that’s something which gets in the way of returns, this idea that I’m going to be right eventually. So we tend to stop ourselves out of those subsector views, if you like, and just say, oh, I don’t know why, but Ferrari’s underperforming Porsche.

GEORGE MICHELAKIS: It’s too sustained, too persistent.

STEPHEN CLAPHAM: And how long will you wait? I mean, how much pain will you take before you… Just say oh well we run to a number so we actually have a percentage by subsector and if that if the drawdown hits that number we we’re exiting so and is that the same for every subsector it varies according to the theme it.

GEORGE MICHELAKIS: Tends to be the same i think in certain cases where the subsectors are lower volatility we’d give ourselves a little more so higher volatility we’ll give ourselves a little more room, yeah, just because there could be more. Yeah, exactly.

STEPHEN CLAPHAM: And how long were you on the long?

GEORGE MICHELAKIS: Three years on average.

STEPHEN CLAPHAM: On average, three years?

GEORGE MICHELAKIS: Yes.

STEPHEN CLAPHAM: And how about short?

GEORGE MICHELAKIS: The average is around 15 months.

STEPHEN CLAPHAM: Great. That’s really quite long.

GEORGE MICHELAKIS: Yes. And what’s really interesting on the short side is one consistent feature of the portfolio is that if you said what are the most aged positions, they tend to be the shorts, i. e.

GEORGE MICHELAKIS: The five names, now maybe that’s because we have more shorts than longs, partly, but it’s also problems don’t get fixed easily. And so when there’s something wrong with the business model, but this is a kind of meandering short, so the names today that are over 10 years old are shorts.

STEPHEN CLAPHAM: Over 10 years old?

GEORGE MICHELAKIS: Yeah.

STEPHEN CLAPHAM: So you have owned shorts for more than 10 years?

GEORGE MICHELAKIS: Yes.

STEPHEN CLAPHAM: Crikey.

STEPHEN CLAPHAM: And what do you do? Do you just keep topping up?

GEORGE MICHELAKIS: Well, if they keep going down, yes. So we’ll keep them at a specific size. And if they go up a bit, we’ll trim. So we’ll just target a certain size, which is back to the data set that I described earlier and mining that data to understand what the size should be.

STEPHEN CLAPHAM: Now, I know accounting is an important element for you. You’ve said, if I have to pick one leading indicator in the short side, it’s aggressive accounting. It tends to be symbolic of a management team that’s trying to prove better than it really is. Why don’t people spend more time in this? Because, you know, people look at me like I’m some sort of geek or something. And why don’t people understand this? It’s not a generally held view, right?

GEORGE MICHELAKIS: I think it talks to… I call it the post-fact world.

GEORGE MICHELAKIS: There’s a kind of facts that are slightly irrelevant. Let’s just talk about the narrative. It does become important in bear markets.

STEPHEN CLAPHAM: We haven’t had one of those for a while.

GEORGE MICHELAKIS: Yes. So I think people then pay a lot more attention to accelerated.

GEORGE MICHELAKIS: Recognition of earnings and I don’t know it just feels it doesn’t feel like the fun part of the business to most people you know the fun part of the business is is kind of watching a stock go up yeah but if you compare this to I don’t know football mm-hmm the fun part is scoring goals I think the best teams are just as good at defense and as I say the worst football team in the Mongolian League scores goals.

GEORGE MICHELAKIS: They’re still the worst football team in the world. You need to get both sides right. I just think the fun part is scoring goals and not defending.

STEPHEN CLAPHAM: A number of your shorts have had accounting issues. You were short of Carillion. You were short of Wirecard. You were short of Silicon Valley Bank. You were short of Credit Suisse. Do you think it’s more prevalent today? Because I think that there’s a lot more earnings management going on.

GEORGE MICHELAKIS: I don’t have a great sense of whether it’s that much more prevalent than before. I would say…

GEORGE MICHELAKIS: The opportunity set is as ripe as it has been. I don’t see any change. I haven’t noticed any particular change.

GEORGE MICHELAKIS: But again, when the sun’s out, no one cares. It’s kind of like, you know, the analogy I would use, it’s like having security in your home.

GEORGE MICHELAKIS: If it’s the middle of summer and during the day, Do you really need an alarm system? I mean, everybody’s just walking around and happy. I think it’s when it gets late at night and that’s when you suddenly go, maybe I should install an alarm system. So I think management teams want to impress. They don’t want to disappoint. They want to keep their jobs. They often have…

GEORGE MICHELAKIS: Shorter lifespans than we realize. I mean, I’m sure you’ve been in the markets for 25 years. I’ve been in the markets for 25 years. The average duration, if you exclude the super long duration CEOs, is probably three or four years. So they just don’t have the time to prove themselves. And so what’s the quickest fix? The quickest fix is pulling out an accounting number.

STEPHEN CLAPHAM: Yeah. And there’s no point in investing for the future because you’re not going to be around.

GEORGE MICHELAKIS: They’re probably not. Again, often this is coming at the end of their careers and is seen as a promotion that they’ve earned, which is probably a little bit upside down, I think. The one thing I would like to see is younger management teams.

STEPHEN CLAPHAM: The average S&P 500 CEO is probably 55.

GEORGE MICHELAKIS: Yeah, but what’s that in Germany?

STEPHEN CLAPHAM: I don’t know.

GEORGE MICHELAKIS: Probably not 55. So I think just bringing in youth to reignite innovation as opposed to making sure that things continue to be done today as they were yesterday. What we’re seeing is… Things are changing quicker, more quickly. I would say that the younger generations really do see the world differently.

GEORGE MICHELAKIS: They’re buying differently, they’re experiencing differently, they’re looking for different things for their money. And so consumerism is changing. I think if the corporates aren’t aligned with that, they’re going to struggle. That’s what we’re seeing in the consumer world today, just changing preferences.

STEPHEN CLAPHAM: So, look, just talking about the hedge fund industry, I mean, I imagine you’ve got quite a lot of respect for the pod shops, but the growth of the pod shops and algos have changed the way the market works quite a lot.

STEPHEN CLAPHAM: I mean, how do you cope with sort of the… Extra volatility around results and that sort of thing and and i mean is it a bad thing i haven’t sensed that it’s a bad thing i think one needs to be a little more aware of the.

GEORGE MICHELAKIS: Trading into the numbers let’s say you know that often the pot shops have got access to data or they’re seeing something you know they’re being a little more precise on exactly what they change in euro, dollar, or sterling, or some foreign exchange. So they’ve modeled this thing a little more precisely.

GEORGE MICHELAKIS: And I don’t see a big problem with that. Where I do see a little bit of an issue is where there’s crowding, as you’ve seen in these US sort of CapEx stories around AI. And then the company beats by 3% and the shares are down 10% because people were expecting a beat by 5%. And now that becomes a much harder… Area to manage.

STEPHEN CLAPHAM: So how do you do that?

GEORGE MICHELAKIS: I think my interpretation, frankly, is that that crowding is probably telling you something else, which is everybody already knows everything. And so you have to be careful about what people are… You have to think what could people not be thinking about at this point.

GEORGE MICHELAKIS: That’s quite tricky though yes yes you’ve got to alter your perspective back to get out of the left brain just telling you that there’s a beat or a miss or you know the balance sheet is extended and all the good factual extrapolations that we can make you know are spreadsheetable let’s say and shift to how could this be changing in a way that i can’t put in a spreadsheet that’s making it less obvious than it was before.

GEORGE MICHELAKIS: So, for example, DeepSea came along and showed that maybe you didn’t need to spend as much money and tougher questions were going to be asked about ROIs of all the hyperscalers. And that’s all you needed to know to realize that the upgrade cycle for this CapEx build was probably done.

STEPHEN CLAPHAM: But any… Halfway sensible person could have asked that question before, but the stock market was completely ignoring it.

STEPHEN CLAPHAM: I mean, you know, if you were if I was trying to explain this to some, I was trying to think about if I was trying to explain this to somebody that beamed down from Mars and say, well, you’ve got these, you know, really successful tech companies and they’re full of cash and they’re generating massive returns.

STEPHEN CLAPHAM: But they’re now throwing huge pots of money down the toilet because they’re hoping that something’s going to happen and they can’t all win so you know in the aggregate you would expect the shares to go down because if you’re burning 300 billion dollars without a hope of getting anywhere near a sensible return than that which seems to me highly unlikely, then, you know, if you’d painted that scenario, you would expect the shares to go down, but the shares haven’t gone down because everybody’s very excited.

STEPHEN CLAPHAM: But it’s very difficult to explain that to the Martian. How do you sort of make sense of this world then?

GEORGE MICHELAKIS: I mean, there’s a lot of sub points to what you’ve stated. The question is the ROI and then and There’s a counter argument, for example, that Meta, who were early to adopt AI, have exhibited an extremely high ROI on that spend.

GEORGE MICHELAKIS: You could argue that Amazon is simply building capacity for inferencing. They’re not really throwing money down the toilet. They’re just making sure that they’ll have the inferencing capability. They’ve all got their own decision tree. And one needs to understand specifically who’s doing what and what the ROI.

STEPHEN CLAPHAM: You can tell me that I’m talking rubbish.

GEORGE MICHELAKIS: I’m saying this, you could make that argument for certain other companies. Where it’s less clear.

GEORGE MICHELAKIS: I’m saying, and I think a little bit, I think that argument was being made for OpenAI where the spend is just so high, the revenues are lagging, and I think Microsoft kind of went… Maybe the government could fund that instead of me.

GEORGE MICHELAKIS: So logic prevailed, or industrial logic prevailed. You can see why Microsoft’s sort of stepping away from funding open AI in an open-ended way.

GEORGE MICHELAKIS: I think you’ve got to understand each of their decision-making.

STEPHEN CLAPHAM: The tree the decision-making tree yeah and and you know i mean i i own Meta and i think it’s got a massive opportunity with all this i mean i i i kind of get that and i i’ve kind of sort of been more worried about alphabet because it seems to me it’s kind of hard for it to get into a better situation than it was before all of this and in order to even keep close to its present or previous situation, it’s going to spend a lot more money.

STEPHEN CLAPHAM: So in the end, it’s hard for me to see Alphabet ending up worth more. So I don’t know. But we don’t want to talk about these stocks because everybody talks about these stocks. And I’m much more interested in talking about what we can learn from chess, because chess has been human plus machine for a very long time.

STEPHEN CLAPHAM: And in fact, I used to work with someone that competed in the, I don’t know what you call it, the computer-assisted chess championship. So the human plus machine. So what do we learn? I mean, you keep quoting Garry Kasparov, human plus machine isn’t the future, it’s the present. Those who adapt will be successful. Those who do not will fail.

GEORGE MICHELAKIS: How are you adapting or how should people adapt because you don’t want to tell secrets but i think i’ve had the value or the benefit of having watched the chess world evolve yeah in 1985 they had these sort of plastic essentially part plastic part some some computer program but very primitive computer program promoted by the way by Kasparov in 1985 but there were very much for kids at home.

GEORGE MICHELAKIS: And that by 1990, you had something on your desktop called Fritz, which any half-series player was using. By 1995, Kasparov lost to Diplu. Yeah. By 2000, everybody was using Machine pretty much for everything.

GEORGE MICHELAKIS: Yeah. By 2005, even relatively weak machines were better than the best players in the world. So it’s, and by the way, that’s already 20 years ago. Yeah. So what’s happened in the next 20 years is people adjusting to how to become symbiotic with the machine.

GEORGE MICHELAKIS: And, I mean, this sounds far-fetched, but literally I think the kids who grow up using the machines. Have their brains wired differently. It actually fires different synaptics and creates a different brain structure. And so a little bit, I think what you’re looking for is a generational shift that will use all the modern technology more.

GEORGE MICHELAKIS: It just is. As I remind people, when you go home, do you turn on the light and say oh that’s technology you grew up with lights yeah it’s technology right if you had to go back a couple hundred years you’d have to teach somebody how to turn on the lights yeah and so i think it’s it’s it’s building an organization that’s symbiotic with technology in a way that’s not thinking.

GEORGE MICHELAKIS: I don’t believe there’s a mere cooper or I’ve developed a screen that’s using Lama, Anthropic. I think it’s building an organization that’s far more cohesive with the state of technology today.

STEPHEN CLAPHAM: But so i mean we take the example the formula one drivers and they’re all on the simulator and they can They know the circuit before they get there and all of that. And you think this is happening across disciplines.

STEPHEN CLAPHAM: People are demonstrating they can leverage new tools to improve their craft to a level that used to take much longer to hone. So are there, I mean, what are the implications in the investing world? I mean, what will a junior analyst be doing in three years’ time?

GEORGE MICHELAKIS: Using AI to do what the analyst three years ago would have had to do themselves.

STEPHEN CLAPHAM: So how do you train? So lots of young people, I mean, a lot of professional investors in this podcast, but also a lot of young people. So, you know, what would I tell my 18 year old son? What should you be doing? He doesn’t want to become an investor.

GEORGE MICHELAKIS: I think the firms have to offer the training in house and have the tools and you’ve got to build the simulator, essentially.

STEPHEN CLAPHAM: Okay.

GEORGE MICHELAKIS: And so you’ve got to get people at the point where they’re happy to work with a simulator for a couple of years and learn from the simulator. Whereas this used to be a craft where you’d have to spend five years with a very strong investor.

STEPHEN CLAPHAM: Yeah.

GEORGE MICHELAKIS: And somehow through osmosis or observation understand.

GEORGE MICHELAKIS: Things that were not easy to learn. I think machines will offer that opportunity in a different way.

STEPHEN CLAPHAM: And i mean what’s your been your experience at Gladstone i mean the team all said oh yeah i can’t wait to you know type my questions into chat gbt or the Gladstone equivalent of it i mean have there been people that said well actually i don’t feel really comfortable about doing that and how do you as a teams kind of work out what this works that doesn’t work it’s one of the things that i’ve found i’ve tried to deploy this technology because I’m obviously old and I need to understand how it works.

STEPHEN CLAPHAM: And there’s quite significant differences between the different tools even. And it’s not necessarily evident unless you’re deploying them in particular context. So how have the team found this? And are you sort of cracking the whip saying, no, you can’t do it in an analog way. You’ve got to do it in an AI way.

GEORGE MICHELAKIS: I don’t think you can crack the whip. I think what you’re talking about is setting a culture internally where people want to. Right. It’s back to, you don’t think, my favorite example is the microwave. And just trying to get your grandparents to use the microwave in 1985. That’s probably not going to happen.

GEORGE MICHELAKIS: The youth today can use a microwave and are very comfortable using a microwave and don’t even think about why would you question that. So you need to align the organization with people that are just comfortable with the idea. I don’t think you can make people comfortable with the idea that are inherently comfortable with the old idea.

STEPHEN CLAPHAM: And when you’re recruiting, is this a big component of the recruitment process? Because you recruit a lot of people, right?

GEORGE MICHELAKIS: Yes. It’s a very important component. So we’re always looking for people that are more aligned with that vision of just embracing technology.

STEPHEN CLAPHAM: And I’m conscious of the time. I wanted to just briefly ask you about management because you touched on it. But it’s a…

STEPHEN CLAPHAM: Big thing for you and you think there’s a lot of overlooked it’s an overlooked source of information just talk a bit more about that i mean and and how do you control so you you say okay we meet management but i’ve always found that you know once you get to be CEO of an s p 500 an executive, you’re very good at sales. How did you get around that?

GEORGE MICHELAKIS: I think it’s training the team, talking about cues, getting people to focus on it. I think most people just gloss over that idea.

GEORGE MICHELAKIS: I think when there’s some error or leading indicator of something that’s not quite right, acting quickly, recognizing what it is. I was very fortunate to have started my career in private equity, and over the course of almost five years, I met at least 500 management teams. Oh, really? Yes. And so it was a particular experience.

GEORGE MICHELAKIS: We were focused on financial services. We were the only people focused on financial services in Europe, the only private equity firm that did that for a living. And so I just got to meet one management team after the other. It would often be one or two a day, depending on exactly what was happening.

GEORGE MICHELAKIS: So I think I’ve built up that skill set early on.

GEORGE MICHELAKIS: I do recognize that most people struggle with it. They just don’t even know where to begin.

GEORGE MICHELAKIS: So I think it’s just making that part of your process. We’ve already built some AI. That goes and looks at, does this team hit the numbers? Do they sound optimistic and then pessimistic? Is there consistency in what they’re saying and what they’re doing?

GEORGE MICHELAKIS: And again, these were early iterations of any such tool. But the point is, if you know what you’re looking for, you can get a machine to at least do. Part of the heavy lifting for you.

STEPHEN CLAPHAM: Interesting. And that’s using natural language processing and that sort of thing.

GEORGE MICHELAKIS: Exactly. So this is no longer just a series of data with numbers that we’re now going to put a linear regression model and say, ah, that’s a signal. This is a machine that can actually see the words, understand the words, understand, input a commas, of course, pick on words, and then see whether the actions are consistent with that.

STEPHEN CLAPHAM: And how are you going to balance the left brain, right brain? Music. It’s people, right? It’s very touchy-feely. But you’re trying to make it also a data-driven exercise.

GEORGE MICHELAKIS: Yes. Well, I think this is where the large language models are somewhat capable of even replicating parts of our right brain. Because these are neural nets, in a sense, that are copying the human’s brain.

STEPHEN CLAPHAM: Yeah.

GEORGE MICHELAKIS: The easy, easy stuff is… Can you calculate EBITDA, which is a left-brain thing? The harder thing is, they said A and then they did B.

GEORGE MICHELAKIS: How meaningful is that? Do we need to care? They sounded optimistic and then missed numbers. Do we need to care? But they’re capable of absorbing so much more of these cues as opposed to, it’ll take an analyst two weeks to do something which a machine can do in an hour.

STEPHEN CLAPHAM: So will you be recruiting more data scientists and will you become more computer heavy?

GEORGE MICHELAKIS: I think yes, but balanced. I think, again, back to we’re looking for man plus machine, not machine plus man.

STEPHEN CLAPHAM: I mean, it’s quite tricky, isn’t it? Because you’re sort of at the leading edge and you’ve kind of got to be at the leading edge, but how do you assess how good you are? Because you don’t have the learning curve. You don’t have the experience. It might be quite tricky, isn’t it?

GEORGE MICHELAKIS: Yes. No, I think I’m not pretending to myself that we’re on the leading edge. I think we’re saying this is where the future is. Let’s make sure we’re there and let’s keep learning. I think when you think you’re on the leading edge, that implies that you’ve got some answer to something. And again, I…

STEPHEN CLAPHAM: By definition, you are, right? Because you’re doing this and not everybody is.

GEORGE MICHELAKIS: I’m saying that’s not the mindset. The mindset is not to think that somehow that means anything.

STEPHEN CLAPHAM: But I mean, you must be a pretty confident person. You started this business quite early on in your career, right? You hadn’t been doing hedge funds for that long. And then you were backed by Ted Saidi’s Protégé Partners, and you bought him out quite early on when you still didn’t have much AUM.

STEPHEN CLAPHAM: But you don’t sound terribly confident. You’re quietly confident. What is it, George?

GEORGE MICHELAKIS: Look, I’m a believer that when I see things clearly, I do see them clearly.

GEORGE MICHELAKIS: But I don’t pretend to see things clearly all the time. And so I keep a very open mind as often as I can, as much as I can, about as many things as I can. And when I see something clearly…

STEPHEN CLAPHAM: But what was it you saw clearly that gave you the confidence to set up your own firm?

GEORGE MICHELAKIS: What I saw clearly was that the industry had to continue evolving. That, for example, on the short side, there was not a as deep commitment to getting the short side right.

GEORGE MICHELAKIS: That the industry in Europe was behind the US, it still is, so that hasn’t changed that much.

GEORGE MICHELAKIS: So there were a few things that were very clear to me that did need to change, have changed somewhat. I’d say the gap between… The firms that are still doing long-short equity in Europe and the US firms is now much narrower. But what I didn’t expect was that the number of firms in Europe would shrink dramatically doing long-short equity.

STEPHEN CLAPHAM: And why is it you’ve been so successful at the short and why do other people find it so difficult?

GEORGE MICHELAKIS: I think…

GEORGE MICHELAKIS: It’s easy to make mistakes on the short side where there’s a host of them that I keep seeing being repeated. I would go with one, you know, some earnings headwinds equals a short. Yeah, that doesn’t tend to produce much alpha.

GEORGE MICHELAKIS: Two, being overly thematic. Yeah, but all these companies are going to be in trouble, and that’s the most expensive one.

GEORGE MICHELAKIS: Luxury is in trouble, but Hermes has retained its super multiple. Autos are in trouble, but Ferrari has retained its multiple. So to be too thematic. Three.

GEORGE MICHELAKIS: And this is a good one. I think if you’re shorting after the big leg down, I think alpha is elusive. You need to be there at the right moment to capture the rump of the alpha. And so you need to be committed to the exercise of shorting in advance of it happening. So you need to be… Mind it that way back to you need the short culture it can’t be an afterthought i again it’s not as much fun as picking lungs and it’s a more.

STEPHEN CLAPHAM: Blue collar process oriented detail oriented and painful exercise yeah i mean i my experience was that You got a limited amount of pleasure for the four shorts that went wrong and an unbelievable amount of pain for the one five that went right. So it went against you, obviously.

STEPHEN CLAPHAM: You know, the short, the shorts went down, gave you a bit of pleasure and a bit of bit of money. And the short that went wrong cost you a huge amount of money and a huge amount of sleepless nights. And so I never thought it wasn’t a net.

STEPHEN CLAPHAM: Enjoyable experience for me I always found it I was because you have to be much cuter in the timing yes and and that I found was was more difficult because I wasn’t as good at the timing whereas in the long you can be out on the timing and you can just build the position more slowly and average down check and do all of that but that’s.

GEORGE MICHELAKIS: The averaging up on the short side i always find well here’s the interesting thing hit rates on the short side you’re not doing badly at 50 percent yeah so if you get one out of two that works as opposed to doesn’t work i think you’re doing pretty well i think where people have struggled but is the essence of the short sell business if you like is the slugging ratio, i. e.

GEORGE MICHELAKIS: When you get it right, make sure you’ve captured as much of that as possible, and when you get it wrong, being quick to exit. And I think part of the challenge is it’s people that are curious in a certain way and intellectually dig in certain places, but then they lack the pragmatism of… Wirecard, we were short in 2016.

GEORGE MICHELAKIS: At the beginning of 2016 and had to throw in the towel. Or it was just too early. And came back at the end of 2018. And so, which was the perfect time. So this timing dimension and recognizing that this is maybe a great intellectual idea.

GEORGE MICHELAKIS: But a terrible commercial idea. And recognizing those are two different things tends to be where people get stuck, that they fall in love with the intellectual side of it and then miss the commercial side of it.

STEPHEN CLAPHAM: And also, you’re just worried that you’ll miss it because if you close it, and with something like that, so with Wirecard, famously, John Hempton lost money, and he was the guy that gave Dan McCrum.

STEPHEN CLAPHAM: The the original idea and you know i’ve interviewed Dan he sat in that seat the and we we published the the interview the day the book came out and he you know the story is a fascinating story but there’s always a worry isn’t there if you if you you know that it’s a fraud you know it’s a bad thing and you think well if i close the shore then tomorrow it will be an ft and the thing old claps there’s always that temptation how’d you get over that yeah.

GEORGE MICHELAKIS: Data, stop losses, just be way less emotional about these things and just make sure that, again, the intellectual, it’s also having intellectual confidence to recognize that it’s not that your mind is wrong, it’s that there’s a commercial dimension.

GEORGE MICHELAKIS: It’s a bit like, I don’t know, this AI stuff, people have been working on it for 10 years. And it sort of had its moment when ChatGPT arrived. And before that, there was almost no point in talking about it. But it’s grasping the commercial relevance of your intellectual insight and having the patience to say, it’ll happen.

STEPHEN CLAPHAM: Keep an eye on it.

GEORGE MICHELAKIS: Exactly.

STEPHEN CLAPHAM: It’s been fascinating talking to you. We always ask people to recommend a book to a young person thinking of coming in the industry.

GEORGE MICHELAKIS: I’m going to recommend something a little bit unusual, but it fits in with what I’ve been talking about. And there’s a book called The Divided Brain or Divided Mind by Ian McGilquist, which talks about the two hemispheres of the brain and what their various functions are.

STEPHEN CLAPHAM: It’s very funny because two months ago, we had an interview with Tom Slater, who manages Scottish Mortgage, and he was talking about that same book. It was a book that you have to be reading. Did he recommend it? He recommended a couple of books, and that was one of the books he recommended.

STEPHEN CLAPHAM: So that’s good, but it’s fine because it’s even better to have the same book recommended because it means that I will now go out and buy that. I’ve got a huge pile. Reading pile, which I’ve now moved to the office and I had them build me extra bookshelves because I’d run out of bookshelves at home.

STEPHEN CLAPHAM: So I’ve now got bookshelves in the office here and I can tell that we’re going to run out of shelves. Listen, it was really interesting, fascinating talking to you. I really enjoyed the conversation. Thank you so much. Thank you.

STEPHEN CLAPHAM: Well, I thought that was a really fascinating conversation. And I’m not surprised that… How successful the Lasker Fund has been. George has what is essentially a fairly simple investing philosophy, but like many simple formulae, the practical application is considerably more complicated.

STEPHEN CLAPHAM: I’m not sure what you can take away from this and apply to your own portfolio, but George talks a lot about data and studying past performance, and it’s clear that learning from mistakes is an important element of the Gladstone success formula. They’re clearly expert shorters, so it’s interesting that they’re a training client behind the balance sheet.

STEPHEN CLAPHAM: And that willingness to learn and improve is something I have observed at a number of successful investment funds. People who are confident in their views, but open to listen and learn from others with a different idea. Or simply to learn. After the interview, we had a chat outside the office on one of those lovely, crisp, cold, sunny winter days in London, and we had a debate about a stock we both had an interest in.

STEPHEN CLAPHAM: And I then understood what makes George a great investor. I wish we’d had that discussion on mic, but perhaps I shall write it up in my sub stack. You can sign up in the top right of the homepage on BehindTheBalanceSheet. Com. Thank you for listening. And don’t forget, please leave a five-star rating on Apple Podcasts or Spotify.

GEORGE MICHELAKIS: It really helps spread the word.

STEPHEN CLAPHAM: This podcast is about more than finance. And I would like to tell you about the charity we support. Duchenne UK was set up by Emily Rubin and Alex Johnson in 2012, following both of their sons being diagnosed with Duchenne muscular dystrophy. Duchenne is a progressive condition diagnosed in childhood that causes all the muscles in the body to gradually but irreversibly weaken.

STEPHEN CLAPHAM: There is currently no cure for this disease, although there is hope. Emily and Alex set up the charity to advance treatments and care for everyone affected by the disease. Duchenne UK has tackled some of the big challenges in drug development in a search to accelerate the development of treatments, committing £18 million in the last 11 years.

STEPHEN CLAPHAM: But they still need our support to continue their groundbreaking and life-changing work. Please play your part. In helping to change the lives of both children and adults with Duchenne muscular dystrophy. Visit their website at bit.ly forward slash BTBS BUCH. That’s B-I-T spot L-Y forward slash BTBS behind the balance sheet. D for dividend, U for underperform, C for capital, H for hedge fund. Please help. Thank you.