Contents

00:00 – Nick Train’s investment philosophy

12:44 – Evolving value opportunities

26:02 – Dual mandate in investing

41:35 – Long-term business valuation

56:56 – Engaging with management decisions

01:05:24 – Trends in alcohol consumption

01:21:13 – Building a long-term track record

Transcript

STEPHEN CLAPHAM: Hi, Steve Clapham here. 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 successful investors, strategies, and tactics.

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STEPHEN CLAPHAM: Nick Train is often described as one of the most renowned investors in the UK. He has built up a highly impressive track record over 40 years, investing for the long term in what he describes as eternal franchises. Indeed, he says his ideal holding period is forever, and he rarely trades. He explained why in our discussion, contrasting himself and Anthony Bolton.

STEPHEN CLAPHAM: He read Bolton’s book. With his analogy of turning over pebbles in a beach and finding a huge raft of investment opportunities. In contrast, Nick describes his journey as wandering through a desert for years before gloriously happening on a monolith.

STEPHEN CLAPHAM: Nick’s focus is the UK and we discuss a number of his holdings including Rightmove, Diageo, Unilever and Elceg. He explains his recent focus on digital data asset plays as a complement to his traditional investments in consumer brands. Why he holds only 25 to 30 stocks in highly concentrated portfolios.

STEPHEN CLAPHAM: Why he’s now prepared to pay up to 50 times earnings for asset-like digital businesses versus old preference to pay no more than 30 times for a stock. Why he sees Diageo as a forever holding and much, much more. His funds have underperformed in recent years and is clearly been painful for Train, but he has high conviction in his stocks and a humble approach that hopefully the performance will turn around.

STEPHEN CLAPHAM: I was keen to have this conversation, and you’ll understand why after listening to Nick’s wisdom. So Nick, listen, welcome to the podcast. You started at GT, which has spawned many famous investors, including Jeremy Hosking, who’s been a past guest on this podcast. Did you always want to be an investor?

NICK TRAIN: Once I began to understand what was involved and once I came to the recognition that there was a possibility I could parlay my undergraduate degree in history into something that might be remunerative, then I very badly wanted to become an investment manager.

NICK TRAIN: I can’t claim that I had a sort of childhood vocation for it. But the more I thought about it, and this is a realisation that lots of people come to, I’m not claiming originality, but the investment challenge is quite closely related to the challenge, at least for the undergraduate historian, of trying to make sense of a potentially infinite amount of… Information and or opinion.

NICK TRAIN: And, you know, I don’t want to disparage undergraduate history degrees, but, you know, writing an essay, you know, it does, it requires you to marshal information and arrive at a conclusion. And it’s intrinsically interesting. So is this business, as everybody knows, with the added frisson of skin in the game and capital at stake.

STEPHEN CLAPHAM: I mean, history has got a good degree to prepare you for investing, I think. I mean, I had a few, I can never remember what people studied. And having had so many guests, I think it’s been quite a popular choice. I mean, do you have any other history graduates on the team?

NICK TRAIN: No, we don’t on the team. But you’re right, I’ve come across a lot in my career and maybe, I mean, James Anderson famously was a historian. Oh, was he? I believe so, yeah. I ought to know because he was a near contemporary of mine, not quite a contemporary of mine.

NICK TRAIN: But listen, I don’t even think you need a degree to be successful at this. You know, it is Mauboussin, I think it was, who wrote a book, Investing, the Last Liberal Art. Yeah. Maybe he wrote that best part of 20 years ago now, saying that investing was one of the ambits still where qualitative insights could give you an edge.

NICK TRAIN: Whether or not he would maintain that view. You know, in 2025, I’m less sure because there definitely has been triumph is maybe too big a word, but there’s a lot of progress been made by the algos and the stat heads and the math geeks and, you know, all power to them, all power to them.

STEPHEN CLAPHAM: Actually, I don’t think it was Mubasa. Could it have been Robert Hagstrom? I don’t know. I’ll check and I’ll put it in the show notes. Thank you. I mean, I don’t want to take anything away from Michael Mobison. He’s brilliant. I love his stuff.

STEPHEN CLAPHAM: Listen, you left GT when it was acquired by M&G, when it was acquired, and you went to work for M&G for the great Vivian Bazalgette, who I started out in the sell side, and Vivian was one of my favorite clients. She was super smart, super nice, but you only stayed 18 months. And I just wondered, you went to set up on your own.

STEPHEN CLAPHAM: Was that because you didn’t like… The institutional constraints or because you wanted to be an entrepreneur what was it that drove you to set up your own investing business or with michael lindsell well no listen it was simply having had another mount shot out from from underneath me you.

NICK TRAIN: Know i’d i’d you know in a in an alternate universe maybe i could still be running the GT income fund for GT Management. I’ve always been motivated to build really long-term track records, which involves staying at one place for really long periods of time. That’s always attracted me. But GT got taken over and the culture of the company changed.

NICK TRAIN: Going to M&G, I must be careful what I say about M&G, but that was kind of a fulfilment of an ambition for me because I admired the franchise and the brand so much and to have the opportunity to go and work there, certainly at that point in my career, really felt like a major endorsement and a major opportunity and perhaps I would still be running the M&G Capital Fund.

NICK TRAIN: If it wasn’t for the fact that within 18 months of me joining, the Prudential had made a successful offer for M&G. And yeah, losing two businesses that I’d kind of… Committed to, oh, I could have stayed, but it just made me think I was 40.

NICK TRAIN: I wanted to create an environment where whatever happened to the business, it was going to be my decision or Mike’s decision rather than someone else’s decision. So that was the reason that the M&G stint was so relatively brief.

STEPHEN CLAPHAM: And your investment philosophy, I mean, how’s it developed? I mean, over that time, I mean, are you basically doing today what you did when you started at Linzell Train? Has it changed much over the years? I mean, you’ve had a long career. You’ve been doing this for like 40 years, I’m thinking.

NICK TRAIN: Yeah.

STEPHEN CLAPHAM: The reason I ask is because you’ve got a very distinctive approach. And, you know, you said that your ideal holding period is forever.

NICK TRAIN: Which is very… Buffett has said that.

STEPHEN CLAPHAM: Well, he’s the only person who’s said that. So, I mean, you’re inspired by him. You’ve been inspired by anybody else. And how has your thinking changed and developed? And how did you arrive at that idea of the forever holding period?

NICK TRAIN: Well, to give credit where it’s due, and listen, like everybody, you can see Buffett’s fingerprints all over what we’ve always done and what we continue to. To do. A formative experience for me, and this is going back to GT and I know it’s ancient history, but I just want to explain how important this was, was there was an investor at GT Management called Alex Dundas, sadly no longer with us.

NICK TRAIN: And Alex ran an enormously successful Japanese fund. And Japan wasn’t particularly my area of interest or expertise, but I gradually became aware that Alex’s Japanese fund had 12 holdings and never traded. And performance was just off the scale.

NICK TRAIN: Good. And that was such a powerful endorsement of, you know, I’d read about Buffett and what they were doing, and it sort of seemed academic. Academically interesting, but to actually see the approach being validated by a colleague and it working, that committed me to seeking to invest in that way.

NICK TRAIN: Have things changed?

NICK TRAIN: I, well, I mean, I have to acknowledge if you look at the constituent… And, if you like, the thematic ideas in my standard portfolio currently, there has been some change over the last decade and may be accelerating over the last two or three years. I think the fundamental premise of having a concentrated portfolio of what you analyse and… Viscerally feel are high quality businesses, that hasn’t changed.

NICK TRAIN: I mean, that’s the pure Buffett thing. And notice when I say visceral, it’s to hold things for long periods of time. It’s got to be more than just intellectual conviction. Obviously, that’s the absolute bedrock. But there are times when it’s really, really tough to carry on holding things. And that’s the point at which the visceral… Almost emotional attachment to a holding becomes important.

NICK TRAIN: But the point I want to get to is that I suppose my apprehension or appreciation of value has been changing over the last five years. And I’ve come to… To more fully acknowledge that, let’s call them 21st century business models, capital light 21st century business models, can and probably ought to be valued differently from, let’s call them 20th century business models.

NICK TRAIN: And using that different, I might even put some numbers on this in a second. Using that perspective has made me more open to a wider range of value opportunities. Not that I would necessarily have regarded them as value opportunities 10 or 15 years ago. You mentioned Rightmove. We’ve mentioned Rightmove. I mean, that’s a business we initiated in three years ago, is it now? Two and a half years ago.

NICK TRAIN: I probably, 15 years ago, would not have invested at that juncture in Rightmove. And it would have been because of the valuation.

STEPHEN CLAPHAM: You didn’t want to pay up. It’s done 23, 25, I don’t even know, 25 times. That was too rich for that.

NICK TRAIN: It was too rich for the conceptual framework that had worked for me pretty well for the first 30 years out of that 40 year span. But but actually, you know, and I think you’ve alluded to this when you look objectively at Rightmove and.

NICK TRAIN: The extraordinary economics and the extraordinary moat and the likely returns on committed capital to that business, it clearly should be worth more than maybe even the best of the 20th century franchise investments. That’s the way I feel about it. I know how simplistic this sounds.

NICK TRAIN: There’s no element here of prediction, it’s just frameworks. I mean, for a long time I felt that the maximum warranted value that I’d ever be prepared to pay for a business was, say, a 3% earnings yield. A price-earnings ratio of 30 times-ish. That was kind of my limit.

NICK TRAIN: You know, still very different. You know, maybe talking about Diageo, still very different from the way that an asset like that has been valued and definitely is being valued today. But I do, for me, and maybe this is still to be proven, I do feel that there is a cohort of capital light digital franchises where maybe I would feel that a warranted valuation should be an earnings yield of two.

NICK TRAIN: You know, which is 50 times earnings. Again, that’s not a prediction that the shares go there. It’s just a framework to consider where value might lie. And yeah, going back to Rightmove, perhaps at that point, low 20 times earnings, perhaps that was as significant a value access point as… Buying an engineering company in 1985 at below book value.

STEPHEN CLAPHAM: Do you know what I mean? I completely get it. And when I did the, you know, I wrote about Rightmove in my sub stack a couple of months ago, and I was astonished that it made 75% operating margins. Because I think, who else makes 75% operating margins? And then when I looked, and I looked in the US for companies making 75% operating margins, and I found, I don’t know, 15…

STEPHEN CLAPHAM: Companies that made 55 to 65 percent or 58 to 68 percent and they were on an average EV to sales of 13 times which was about the same as Rightmove which was making 75 percent margin. The problem with 75 percent margins is there aren’t very many companies that make such high margins and they don’t always prove resistant to competitive pressure.

NICK TRAIN: Indeed.

STEPHEN CLAPHAM: And so Can you just talk a little bit about how you assess the stability of the… I don’t mean about Rightmove in particular, because most of the people listening to this will be in the US and probably never heard of Rightmove, although it might be more familiar now that CoStar is on the market.

STEPHEN CLAPHAM: But just for the context, Rightmove is a real estate portal which is used by almost every estate agent in the UK. But just… Generally just talk a little bit about you’re you’re holding something forever how do you assess whether the margin is going to be the same in 20 years time what are the factors that you you think about well.

NICK TRAIN: It it’s an excellent question and it’s an excellent question because You know, with many of the classic Buffett-type investments, indeed, like still a significant proportion of the assets that we’re invested in. There is so much history to validate the market shares or the durability of the franchise.

NICK TRAIN: You can say, well, it’s been tested in such a wide variety of economic circumstances. And with a cohort of companies, I mean, you know, Rightmove. When was it founded? 2002, 2003, I think, listed in 2008. My God. Anyway, whatever. I mean, by our standards, that is a relatively young company and certainly hasn’t been tested over multiple decades.

NICK TRAIN: But I guess the best I can say is that we’re looking for, with A younger franchise like that, concurrent, contemporary validation. So it’s very important, the share of views on the site, watching that and looking for confirmation that it retains that allure, tracking the, you know, it’s the company that reveals this. Billions of minutes that are spent on the site, the trajectory there, that’s probably important as well.

NICK TRAIN: What I feel is that your question, people very correctly ask that. How can you be certain that it’s an enduring franchise, an eternal franchise?

NICK TRAIN: You can’t know that. But I think what’s so important with an asset like Rightmove is recognising the risk of not owning it.

NICK TRAIN: If the company’s stated strategy, which is currently being executed upon, if it’s successful, it is going to speak for a… Far larger share of the revenues of one of the most important verticals in the UK economy.

NICK TRAIN: And what NASDAQ’s taught, and maybe it’s taken me too long to learn the lesson, but what NASDAQ has taught is that these platform businesses with cash flow have the potential to not just double their business but but but to to become 10 backers or whatever because you know i i feel with a business like right move or auto trader i mean we’ve we’ve relatively recently initiated an auto trader as well that almost certainly and i i know how potentially weak this sounds but let me say it anyway, almost certainly the big drivers of…

NICK TRAIN: Profits in year seven haven’t yet been conceived of by the executives of the company. It’s just, it’s clear that the optionality for these businesses to grow from that privileged position of commanding so much attention, so much time, and the associated data and insights that they can derive from all of that attention.

NICK TRAIN: You know, I think the only concern with an asset like Rightmove is, is the decision to use a significant proportion of the cash flow for a buyback, is that really the best use of that capital? I mean, today on balance, I think that the company’s allocated capital well, but you’d imagine at some point down the line, listen, we…

NICK TRAIN: You say, is the margin sustainable? I mean, in a way, I hope not. I mean, if the margin was 50%, that would still be an extraordinary margin. But if they use that 25% of profit margin to create a substantive new earnings stream based off the current market position, that would be just fine. That would be just fine.

STEPHEN CLAPHAM: But I mean need These companies are a long way from what you’re traditionally perceived as being interested in, a Diageo or a Unilever consumer brand. If you think about the margins in those businesses, what gives you the confidence? Is it just the historical record that they’ve done well over many, many years?

NICK TRAIN: I think it’s a combination. There are certain brands that are so unique. Difficult to compete against that you can be really quite confident that margins can be sustained over time. I mean, I think for Diageo, Guinness is a case in point.

NICK TRAIN: But Diageo is more than Guinness, although I must say, I do think that Guinness is at the current market capitalization of Diageo, Guinness would be worth a very… Substantial proportion of the current enterprise value. Oh, sure. That’s putting that to one side.

NICK TRAIN: But I think that one’s got to acknowledge and give credit to these businesses for their ability over time to upgrade and reorient their portfolios. You know, Unilever… Actually does have an extraordinary history of certainly above UK market average profit margins over multiple, multiple decades alongside high returns on equity and a wonderful dividend history.

NICK TRAIN: I mean, that’s all, you know, doesn’t need debating. But when you look at What the brands are that are generating the margins and paying the dividends today, they’re quite different from the brands that were doing it back in 1970, for instance.

NICK TRAIN: And I think one has to acknowledge that consumer companies, they have an expertise in identifying consumer trends and consumer tastes. Part of their success as businesses is smart reinvestment of the cash generated by today’s brands in order to protect future earnings. That’s, you know, that’s hard to model, but it’s definitely a thing.

STEPHEN CLAPHAM: And of course, some of the brands, if you look at Unilever, as you pointed out in your writing, some of the brands are… 100 years old, so that’s got quite long. That’s longevity in India and so on. But what was it that made you sort of suddenly get interested in a right move?

STEPHEN CLAPHAM: I mean, you’ve gone from being known for consumer brands and now you’re kind of, you’ve got almost like a dual mandate, if I can put it that way, where you’ve got the consumer brands and you’ve got the new digital stocks. What was it that Did you just wake up one morning or in the shower just go, actually, I see this? Or was there something external that persuaded you to get involved? I mean, was there a trigger?

NICK TRAIN: Certainly, you know, I’ve used this term. It was certainly a liberating thing for me to do to initiate in Rightmove. It wasn’t necessarily the first of these, but yeah, that certainly felt as though. Something had changed. Listen, I think, candidly, performance pressures were part of it.

NICK TRAIN: You know, I believe that you should learn from the market. No, absolutely. And observe where and how value is being created. Consider how durable that creation of value is.

NICK TRAIN: I also want to give credit to some of my younger colleagues. That wouldn’t be very difficult because I’m very old. But my colleagues have been big proponents of Rightmove, for instance. It might have been more advantageous for my clients if I’d bought Rightmove the first time it was pointed out to me.

NICK TRAIN: Yeah.

NICK TRAIN: Why do you want to invest in Knorr flavorings? You leave a big brand when you could invest in when you could invest in Rightmove. I mean, that’s a very provocative question. I think what’s important for me intellectually and probably emotionally as well, truthfully, is that.

NICK TRAIN: I draw a very strong distinction between the sort of franchise represented by a right move and a cutting-edge R&D driven tech company where the rewards to success on that R&D spend are just astronomically high, but… Lots of other people are competing to do the same thing, and there’s no certainty that the R&D is going to pay that reward.

NICK TRAIN: I do feel for me that, we’re mentioning these names just because it’s convenient in the conversation, I do feel that Rightmove and Unilever are more similar as investment propositions than you might ostensibly think. Clearly the valuations are different, but… In the end, they’re both franchise type investments with moats, with cash flows. And that made it an easier investment.

NICK TRAIN: I think I was lucky as well. I mean, you know, who’s to say whether this allocation is going to work to the extent that we… We hope that it will. But I had understood 25 years ago, I’d understood relics. I’d understood what the provision of crucial must-have data meant to professionals. And it’s been an amazing and thankfully rewarding experience to watch relics.

NICK TRAIN: Go from delivering books and paper journals to institutions and legal practices around the world to, you know, I think genuinely being at the forefront of AI enhanced analytic tool delivery to those same communities. And yet throughout, Relix has had the authority and the credibility to lead its clients in that way.

NICK TRAIN: That helped. I think that helped.

STEPHEN CLAPHAM: It’s a closer parallel, of course. Look, you hold about 25, 30 stocks and you’re pretty concentrated. I just wondered what are the sort of drawbacks of doing that? Because your stocks kind of have a similar style bias. They might be digital, they might be brands, but they’re kind of in that area.

STEPHEN CLAPHAM: And I just wondered how you balance the benefits of concentration with the risk of holding too few stocks when that style goes out of fashion. I mean, it can for years, and we’ve seen that recently with some of your holdings. So how do you think about the number of holdings? You’ve become more concentrated recently, I think.

NICK TRAIN: Perhaps marginally, yeah.

STEPHEN CLAPHAM: So why is that the right number is really the question. And how do you do it? How do you derive that number?

NICK TRAIN: Well, not through a statistical regression analysis. I mean, you know, maybe that should be the answer, but it’s not the answer.

NICK TRAIN: You know, I think part of this is commercial.

NICK TRAIN: This is a highly, highly competitive marketplace. And it is not easy to differentiate. Yeah. And clearly risk needs to be taken to give yourself the chance of generating a return that might justify an active fee. It’s just a case of what type of risk do you want to take?

NICK TRAIN: And I both intellectually and again emotionally was. Drawn to the Buffett and Munger proposition that Concentration makes a lot of sense, but concentrating on inherently highly predictable business models, that’s what allowed you to sleep at night.

NICK TRAIN: And so that’s the model that I’ve worked with.

NICK TRAIN: Yeah, yeah.

NICK TRAIN: I’ve told this anecdote before.

NICK TRAIN: For me, like everybody, I mean, I’m a huge, huge admirer of Anthony Bolton, Fidelity. And I remember reading Anthony’s book where he said that to him, investment was like walking on a pebbly beach. And every time you turned over a pebble, myriads and myriads, every time you turned one over, there was an investment idea waiting there. And I thought, wow, that’s not my experience of investing at all.

NICK TRAIN: My experience of investing is more like walking through an endless desert. And once every five years, there’s this huge monolith in the middle of the desert. And I say, thank God, you know. There’s the next investment idea. It’s just that was the way it has been for me. And because they’ve come relatively rarely, it’s just felt right that the idea should be backed.

STEPHEN CLAPHAM: So it’s partly the fact that you want to hold them forever. So you’ve got a very high hurdle, very high threshold over, you know, which will make you buy something. Whereas Anthony was quite happy to buy things and if it didn’t work just sell them and move on to the next thing. So he had no intention of holding anything forever. So he had a much lower threshold of criteria.

STEPHEN CLAPHAM: I want to put this without offending him, but he was quite happy to buy something because he thought it was cheap and it would be more expensive in two or three years and then he would move on to the next thing. He didn’t really care. As much as you do about where it would be in 10 years’ time. And because you’ve got this long-term horizon, you’ve got to be very, very sure before you buy something. Would that be a fair…

NICK TRAIN: Yeah, no, it would.

NICK TRAIN: That’s how Buffett said he did it. Although, you know, clearly there’s quite a lot of arbitrage going on. Well, there was quite a lot of arbitrage going on in… In Berkshire Hathaway.

NICK TRAIN: But the idea just to me makes sense and, sorry to repeat myself, viscerally and emotionally it makes sense to attempt to find an asset that you would be happy for your family to own for the foreseeable future. That’s kind of…

STEPHEN CLAPHAM: The starting Hurdle but Alex Tendass had 12 stocks and never traded. Did you have you tried that?

NICK TRAIN: Never never quite as few as 12.

STEPHEN CLAPHAM: I mean, I don’t recommend it. I have done it When when one goes wrong is quite painful.

NICK TRAIN: Well indeed indeed I mean, you know, I’ve had to go wrong Diageo being one of them over the last couple of years, and that’s been very painful. I apologise to any shareholders who are listening to this.

STEPHEN CLAPHAM: Well, don’t apologise.

NICK TRAIN: Well, yeah.

STEPHEN CLAPHAM: So, look, you’ve said that you won’t own more than 15% of a company. Is that because you’re not interested in influencing management? Or you say you don’t have the expertise to advise management and manage your business. Seems very sensible. I wondered why that threshold? And do you have any thoughts about activists?

STEPHEN CLAPHAM: Because we’ve seen activists in some of your stocks, notably Unilever, and sometimes they can add operational, probably very rarely operational, but sometimes they can add capital allocation value. But more often, they seem to be just out to make a quick buck. What are your thoughts on that subject and why the 15% limit?

NICK TRAIN: I mean, the 15% limit, it’s a bit arbitrary.

NICK TRAIN: And I wouldn’t lend any great weight to it, but you’re right that what we wanted to imply was that we weren’t scared of owning a material proportion of a company because we’d given ourselves the latitude, rightly or wrongly, to say that we’ve got semi-permanent capital entrusted to us and therefore we shouldn’t be scared of owning big stakes in wonderful businesses for long periods of time.

NICK TRAIN: But we also wanted to signify, and I’m just going to repeat what you’ve said probably more succinctly than I can, that we don’t, we certainly don’t back ourselves to add anything to the operational management of a business. And it just felt to us once you went over 15, but maybe it’s over 10. I don’t know. There’s almost an expectation that you’ve got.

NICK TRAIN: A skill set that would enable you to advise a given executive how to be more effective and that that’s that’s definitely not the case i i i like what you say about capital allocation i i i do think if we can help at all at times it may be helping companies think through capital application of at least being consistent in the way that they do so.

NICK TRAIN: You know, I still feel, you know, a formative part of my career was running an equity income fund for a long period of time during a period when actually there were quite high rewards. For running an equity income fund as a strategy.

NICK TRAIN: But I look back at the, you know, even now, the disappointing returns out of the UK stock market over the last 15 years, and I wonder how much was I to blame or how much was I and other income-seeking institutions to blame for, you know, the paucity of growth available in the UK stock market?

NICK TRAIN: And I certainly think at the margin, encouraging companies to pay out too high a proportion of retained earnings as dividends, that is part of the mix of whatever has held the UK stock market back. Which is, I think I said earlier, I’m not in any way…

NICK TRAIN: Criticizing Rightmove’s capital allocation policy. So far, it’s been successful, but it’s something that we would watch closely. They don’t have to do a buyback every year. And if there was an investment opportunity, that would be even more accretive.

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STEPHEN CLAPHAM: But, I mean, presumably there’s been all these equity income funds because there’s been a demand from the end investor. I mean, who’s to blame for this? I mean, is it the wealth managers?

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STEPHEN CLAPHAM: You might not have a view, but do you have any thoughts about it?

NICK TRAIN: I’ve got a lot of thoughts about it, but maybe…

NICK TRAIN: Maybe what I really think about it, which might not be enough, but I think that, or I note, that in 2000, Relex was the 68th biggest company in the FTSE 100. And today, it’s the eighth biggest company in the FTSE 100. That is a digital growth business that has become now a top 10 company. In the UK.

NICK TRAIN: If RELX can fulfil the promise of its investment in AI-enhanced tools, maybe RELX can become the biggest company in the UK stock market. If it did, or another one, and it could be seen that the UK market could host a globally significant or a cohort of globally significant growth businesses, I think people’s behaviour would change.

NICK TRAIN: You know, we know anecdotally that private investors in the UK have been big supporters, and rightly so, of the zero-dividend-yielding US growth companies. I mean, it’s not that people are unaware of the opportunity to access these sorts of growth stories. It’s just… For whatever reason, I’m perplexed that the UK hasn’t really thrown up many, if any.

STEPHEN CLAPHAM: Yeah, well, it’s a big question, of course. And there’s plenty of good growing tech companies in the UK. I mean, you know, people kind of write off the UK market unfairly in a way. Yeah, you said when I was doing the research, I’m a hoarder of precious things. I care less about valuation. I just wondered, how do you think about valuation?

STEPHEN CLAPHAM: I mean, you must, and you alluded to it earlier, you do think about it. Well, what do you do when it gets to over 50 times or an older economy stock gets very highly valued? Do you just hold on and hope that the compounding will take care of any temporary overvaluation? You know that these companies will be good companies in 20 years’ time, or do you trim? I mean, do you have a…

STEPHEN CLAPHAM: A rule-based strategy or how does it work?

NICK TRAIN: It’s a painful question. It’s a painful question for me to contemplate.

NICK TRAIN: The preference is to hold it forever. Yeah. Danger of that is it breeds a complacency and a toleration for valuations to be vulnerable to even marginal disappointments. I absolutely get that.

NICK TRAIN: But no, I think I’ve just got to say that the preference is to let the compounding do the work over time.

NICK TRAIN: I know that the history doesn’t necessarily in any way predict the future, but I think it’s so comforting at times to look back at long-term price charts for businesses of the type that we’re discussing.

NICK TRAIN: Many of them have done really well over multi-decade periods and That’s the ideal, isn’t it? That’s what you want to own something that in 20 or 25 years time is going to have done it for you. And you also know that along the way, there will be variations in valuation and there will be periods of underperformance resulting from value getting ahead of itself.

NICK TRAIN: But the instant you start introducing that into… This sort of investment approach you just create transactions, transaction costs, uncertainty and for choice we think that we can do a better job for our clients by sitting on our hands as much as we possibly can.

STEPHEN CLAPHAM: I mean it’s a perfectly reasonable answer it’s quite interesting because you’re…

NICK TRAIN: But I’m talking as somebody who, you know, Diageo got to 28 times earnings during COVID when there was that boom for spirits consumption. And it’s now trading on 15 times earnings. And that’s painful. And you look at that and you think, well, could I have done better? I don’t know. But this is obviously this is why this industry is. Frustrating at times. Yeah.

STEPHEN CLAPHAM: I’ve interviewed three growth investors. You’re the third growth investor I’ve interviewed this year. And I’ve interviewed a lot of value investors. The value investors are completely rule bound. And, you know, once things get above their level of intrinsic value, they just sell them and they don’t really care if they overshoot or they’re not there for the forever.

STEPHEN CLAPHAM: And Christopher Asai, who… Is it the August podcast and you’ll be the September podcast? We were sitting in this same room a couple of months ago and we were talking about Costco and he said, well, you know, it may be overvalued. It was on 55 times earnings.

STEPHEN CLAPHAM: And I’m like scratching my head because I can’t imagine why you’d want to buy Costco at 55 times earnings, traded at 30 times earnings and earnings which were understated. Because it had been investing in infrastructure, so it had quite a lot of capacity drag. So it’s trading at probably twice what it used to trade at, and it’s a much bigger company, and therefore probably likely to grow more slowly.

STEPHEN CLAPHAM: It hasn’t changed the company. And then I had the manager of Scottish Mortgage. Tom was saying that When things get to his volume, he’s quite happy to sell them, especially if they’re larger, because what he’s trying to find are the Teslas of tomorrow.

STEPHEN CLAPHAM: So, you know, the Tesla of today might still do well, but his opportunity set is tomorrow’s 100 bagger, tomorrow’s 10 bagger. And it’s quite interesting, the difference in philosophy. And I don’t know I mean, I don’t really like the term value investor, growth investor, but there’s certainly a difference in mindset between a quality growth investor and a value investor.

STEPHEN CLAPHAM: And the value investor seems to be much more interested in the mechanics and the valuation and the numbers, and the growth quality investor owning it for longer, so you’re much more interested in the intrinsic worth of the business and the non-financial values. Is that… Something you ever think about?

NICK TRAIN: I guess all the time.

NICK TRAIN: Sorry, but just a little more specific, what am I thinking about?

STEPHEN CLAPHAM: Just wondering if there’s a way of merging the two philosophies, because at the end of the day, the valuation must be important. I think the problem with that, I think the reason that people like yourself want…

STEPHEN CLAPHAM: Who want to own things for a long time, they find it very difficult to take the top off something because they don’t know they’ll be able to get back in and get their waiting back. Is that the thing that discourages you? Or is it just a distraction? Because what you want to be doing is focusing on the 10 years, not the 10 months or 10 weeks.

NICK TRAIN: Yeah, I mean, there’s a distrust of…

NICK TRAIN: Of timing, you know, the certainty, all of the studies. I’ve seen it. We can confirm, you know, grotesque overconfidence on the part of individuals that they can add value by trading. There’s the known cost of it. Yeah. It’s, you know, this is tough. You know, it’s a privilege. It’s a joy. But it’s tough. What wanting to ensure that you’re working with a set of behaviors that give you an edge.

NICK TRAIN: And I think having a concentrated portfolio as opposed to a ragtag portfolio of miniscule. I think that that’s an edge.

NICK TRAIN: I think that not trading intrinsically value creating potentially very valuable businesses brings an edge. Not investing in what are obviously speculative or in my opinion deep value assets, I think that brings an edge but not all the time and there’s still plenty of scope. Within those good investing behaviors to make errors.

STEPHEN CLAPHAM: So what would make you sell a stock?

NICK TRAIN: Well, I…

STEPHEN CLAPHAM: You have sold stocks.

NICK TRAIN: I have sold stocks, yeah. I have sold stocks.

NICK TRAIN: Listen, the central reason would be… Be a growing conviction that the franchise value that we’d identified was compromised or potentially being permanently vitiated by poor capital allocation.

NICK TRAIN: So, yeah. That’s what I’d say. That’s what I’d say.

STEPHEN CLAPHAM: So you must look at deals very closely.

NICK TRAIN: Well, and share buybacks and dividend policies, sure, sure. But, yeah, acquisitions carry a lot of meaning about how executives see their existing assets. Yeah, it demands a judgment about whether there’s value dilution with a transaction.

STEPHEN CLAPHAM: So, I mean, when you see a bad or what you think is a bad or overpriced deal being done, will you engage with management? And I mean, I’m sure you ask them why they’ve done it, but typically what’s your process to figure out, am I at risk because the capital allocation has gone out the window?

NICK TRAIN: How do you do it? No, we do it as you’ve just outlined. We would engage and, you know, I’m finding it hard to think of examples. Let me give you an example. I’m not sure I explicitly share it here, but if management couldn’t persuade us of the…

NICK TRAIN: The increase of value delivered by a transaction, then it would at the very least change our perception of the company and it might even encourage us to sell an asset.

STEPHEN CLAPHAM: So Diageo buying George Clooney’s liquor brand, is it Tequila? I’ve forgotten now what it was. Casamigos Tequila. It was a big price. Were you happy with that?

NICK TRAIN: Not at the time, no.

STEPHEN CLAPHAM: And are you happy now?

NICK TRAIN: Happier now? Yeah, yeah. I mean, Casamigos has had a difficult 18 months, but no, I mean, that has added great value and enduring value for Diageo investors. And I think that is a classic example of a company with an expertise that a portfolio manager wouldn’t have, recognizing… The category, the potential in the category, and what the branding might bring to that.

STEPHEN CLAPHAM: What about LSEG and Refinitiv? Did they approach you? Presumably, you’re a big shareholder. Did they approach you before the deal?

NICK TRAIN: We weren’t made inside to the deal, but we certainly had the opportunity to discuss it with them, yeah.

STEPHEN CLAPHAM: And when that deal was announced, what did you think?

NICK TRAIN: I thought that it was bold, but I thought that it made conceptual sense that aggregating LSEG’s existing data assets and…

NICK TRAIN: Services, aggregating that with what Refinitiv brought and the terminal business, made sense, made sense to us.

NICK TRAIN: The share price today, which is about the same level as it was when the deal is done, is saying three years later, it’s still not absolutely been vindicated. But yeah, I have to say, as people have observed, the fact that Microsoft has chosen to joint venture with LSE plus Refinitiv, that’s definitely an approbation of the deal.

STEPHEN CLAPHAM: Oh, sure.

NICK TRAIN: Yeah.

STEPHEN CLAPHAM: Although there was a $2.8 billion per annum cloud. Contract sure with it.

STEPHEN CLAPHAM: So But well, maybe we’ll come back to LSEG is quite interesting You you follow Natura And MercadoLibre in South America You don’t invest in emerging markets other than indirectly through the likes of the as you and you never I just wondered You just talk about how that sort of work informs your holdings in the developed markets Is it just the intelligence on the local markets or why do you spend time on those?

NICK TRAIN: You need to speak to my colleagues about that. They’re the ones who are doing that work specifically on that company.

STEPHEN CLAPHAM: But it’s not, I mean, do you get intelligence on what they’re doing and how it corresponds to the UK or American stocks you own? Or it’s just a, well, I’ll talk to them.

NICK TRAIN: That demographic increase in wealth, increase in the bourgeoisie globally, that story has gone away, pro tem. I think so, yeah. Just so much investor attention, understandably, is on the United States and the digital businesses in the United States. I mean for for sure the historic premium, which was commanded for some period of time by companies that heavily weighted towards emerging markets, that’s gone.

STEPHEN CLAPHAM: I mean, some of those stocks have done really well, some of the locally quoted ones. Sure, sure. I want to ask you about the investment trust industry. You managed… Two investment trusts, one of which has a stake in your management company, which is quite unusual. I don’t know if there’s a history behind it.

STEPHEN CLAPHAM: Perhaps you could just talk a little bit about that. And I wondered if you had any observations on the Saba raid on the sector and the fact that kind of been repelled, I guess. The investment trust sector is a great sector and it seems to be a bit unloved. I don’t really understand why. I think it’s a great sector. Can you just talk a bit about it.

NICK TRAIN: Well, the savings, the wealth I’ve accumulated, I’ve looked to invest in investment trust assets because I think they have a big appeal and a big competitive advantage relative to other vehicles.

NICK TRAIN: The I mean, the Lintel Train Investment Trust, which is the one that has the stake in our business, it’s a long, perhaps convoluted history.

NICK TRAIN: But we were inspired, in fact, by the origins of GT Management, the company we were talking about right at the outset where I began my career.

NICK TRAIN: GT had been founded in the very late 1960s. And the bedrock of the business was an investment in the management company made by an investment trust in return for the management contract being given to this startup investment management company called GT Management. And that was a hugely valuable symbiotic relationship.

NICK TRAIN: Between the management company and the investment trust because a good job was done over time with the assets the management company prospered and so the original client who’d invested in the equity of the company made a big big return on their capital and when Mike and I set up Lintel Train Limited we were well aware of how relatively unusual it is to get to three years, let alone five or seven or ten years, and a lot depends on performance in the early period.

NICK TRAIN: We thought how attractive it was for us, given our time horizons, to have the support of some closed-end capital behind the business to pay the bills to begin with. And, you know, yeah, I hope, you know… Even today, I will say that I believe has created value for that vehicle, and I hope we’ll do so again.

NICK TRAIN: I need to be careful about what I say about Saba and this whole episode.

NICK TRAIN: I think it’s happened before, perhaps not with this aggression and magnitude, but…

NICK TRAIN: One of the attractions of the investment trust sector, it seems to me, is that the independence of the boards and the fact that they’re publicly listed acts as a sanction for, let’s say, complacent investment management performance. And if you own something that either isn’t doing well or…

NICK TRAIN: Just isn’t doing something sufficiently interesting, then there is a sanction that can close the value for you. And that’s, for a private investor, I think that that’s a potential useful fillip to have to your participation in the net asset value performance. Does that make sense?

STEPHEN CLAPHAM: No, I think absolutely. I mean, I totally agree. I mean, I don’t know how many…

STEPHEN CLAPHAM: Equity investors would be complacent. I mean, you’re quite passionate about the performance of your funds.

STEPHEN CLAPHAM: You’ve been very upset, very publicly, about the fact that you haven’t done as well as you would like to.

NICK TRAIN: I name no names, in part because I’m not even sure I could. But there are… Companies, investment companies and funds that are so diversified and or so closely beholden to the shape of the benchmark that perhaps they’re not really adding value. And unless that is done with prodigious skill, then I think vehicles such as that maybe are vulnerable and maybe justifiably so.

STEPHEN CLAPHAM: Yeah, maybe. Well, should be. Should be. You seem to write a bit less these days. You used to write some brilliant articles that were just like on your research website. And when I was doing the research for this, I really enjoyed them. But no, there were loads of really, really, really good ones.

STEPHEN CLAPHAM: And one in 2016 compared Ambev and Heineken. And you contrasted Ambev’s focus on cost cutting with Heineken’s ongoing investment in brands, which of course at the time made Heineken look… Optically dear relative to Ambev. And I mean, that was really quite prescient.

STEPHEN CLAPHAM: How should the listeners distinguish this quality from the height? I mean, even Mr. Buffett was persuaded by 3G Capital. Bill Ackman was a massive fan of 3G Capital, but they’ve delivered a very disappointing performance, whereas Heineken has continued to do what it’s always done. And has carried on steadily. I mean, I don’t think the share price has been stellar, but it’s certainly been better than AB.

STEPHEN CLAPHAM: How did you spot that? And how should people spot that?

NICK TRAIN: I’m not sure this bit should be recorded, actually.

NICK TRAIN: I think I probably did write that note, did I? It was me, not a colleague. It was you, definitely. Right, okay.

NICK TRAIN: That in… Don’t get me wrong.

STEPHEN CLAPHAM: It’s quite a stale set of arguments.

STEPHEN CLAPHAM: But just generally, philosophically, the question really is how do you find quality?

NICK TRAIN: You put it well earlier, there’s a big hurdle for us. Initiating a new holding. We do so because generally we think, we hope we’ve accessed something of enduring and increasing value. Then it’s really important to see executives of those businesses investing cash flows in a way that confirms our appreciation of the value of a business.

NICK TRAIN: And going back to the mindset when I wrote that, if I can, it just struck us that the savage cost cutting, which clearly involved material reductions in marketing behind unique brands, wasn’t consistent with our sense of here was something precious that deserved needing investing in. I guess that’s where it would have come from.

STEPHEN CLAPHAM: Now, you’ve held Diageo for over 20 years, is that right?

NICK TRAIN: Yeah, I’d have thought so, yeah.

STEPHEN CLAPHAM: It’s a very controversial stock right now.

NICK TRAIN: Very.

STEPHEN CLAPHAM: So you wrote that young people in the US were willing to consume spirits at an earlier age and in greater volumes than previous cohorts. This seems, it’s one of these areas where you can find statistics to meet whatever point you want to make. So the Gallup poll that was published last week…

STEPHEN CLAPHAM: It was an 80-year low in the number of people drinking or percentage of Americans drinking alcohol. I mean, it seems to me, you know, people have been drinking alcohol for hundreds of years and they’ll be drinking alcohol in 100 years’ time. Can you just talk a little bit about how do you gauge this and how do you assess the risks? Because there’s a lot of noise about this.

NICK TRAIN: Obviously, it’s a working hypothesis and all working hypotheses can be wrong. But I think the way we analyze the company and the industry is that there is a continuation of trends that have been apparent for 30 or 40 years. And those trends are as people get. Wealthier, they drink less alcohol.

NICK TRAIN: People are definitely drinking less alcohol as they get wealthier. You know, one only has to think back to, I don’t know, the Britain of Gin Lane or the moonshine whiskey in the continent of America in the 19th century. You know, alcohol consumption, alcoholism was, you know, much more widely spread than…

NICK TRAIN: Than it is now. As people get wealthier, they do drink less quantity of alcohol. But it appears that they drink more premium products, and it appears that they drink more spirits than previous cohorts. There’s a very, very well-established… Gain of share from beer and wine from spirits.

NICK TRAIN: And that gives the world’s biggest premium spirits company a tailwind, it seems to us.

NICK TRAIN: Where do I go? Where do I go here? I think that it’s also important to… Just to have this conceptually, Diageo is the biggest spirits company. It’s one of the major alcoholic beverage businesses on the planet in terms of its revenues. Yet it speaks for 4% of total alcohol consumed around the world.

NICK TRAIN: A lot of bad things could happen to that 96% of alcohol. Consumption, low margin, low quality alcohol that wouldn’t change. Listen, I know how disingenuous it is to pick an individual brand, but the prospects for Lagavulin, to pick my probably favorite Diageo brand.

STEPHEN CLAPHAM: I’ve never heard of it. What is it?

NICK TRAIN: It’s an Isla single malt. Oh, right. The Lagavulin. I mean, it’s sublime. It’s a sublime beverage and quite an important brand within Diageo.

NICK TRAIN: It’s not one of the top brands by volume, but the destiny of, let’s say, Diageo single malt brands, where they have the preeminent collection of single malts, that’s not going to be influenced by trends in gross alcohol consumption around the world. I mean, it’s going to be… Influenced by people wanting to experience these highly distinctive and in many cases exquisite products.

NICK TRAIN: Again, I understand how dangerous it is to extrapolate from individual brands, but at the same time, against the narrative that young people are drinking less, young people aren’t interested in drinking culture. By the way, it’s a good thing.

NICK TRAIN: Don’t get me wrong. But the extraordinary recrudescence growth in Guinness, the incredible success of the Tequila boom, which is being driven by inquisitive young people wanting to sample a dark beer or wanting to try a… Provenance rich Tequila.

NICK TRAIN: I think it’s telling you that there’s no reason to lose confidence that the best of these brands have semi-eternal characteristics.

NICK TRAIN: It’s rare to find brands or assets that have semi-eternal characteristics and they’re likely to be highly, highly valuable.

STEPHEN CLAPHAM: I agree and it just seemed to me that their valuation, their revenues were inflated in the COVID period. So when we came out of COVID, there was inevitably going to be a correction. I’m just slightly surprised that the correction has carried on.

STEPHEN CLAPHAM: To the degree that it has. And of course, there’s things like the GLP-1 impact, the idea about young people being more fitness-focused, the problems in Latin America, the weakness in… There’s a string of reasons, but I’ve been surprised.

STEPHEN CLAPHAM: I mean, have you been surprised at how low the shares have gone? I don’t claim to be an expert in Diageo. I’m a casual observer, although I do own the shares. Took advantage of the weakness. But have you been surprised at how low it’s gone?

NICK TRAIN: Yeah. Maybe dismayed is a better word.

NICK TRAIN: But, you know, I think one has to acknowledge that there’s been a geopolitical and macro effect here as well. Yes, terribly.

NICK TRAIN: The tariffs and at least the temporary current weakness in the dollar, that’s been disadvantageous for Diageo. You know, I think one of the things that people need to be clear about when they’re thinking about Diageo is that in many ways, it is a participation on wealth creation in the United States. I mean, that’s half the business. I mean, It’s much, much bigger in the U. S. Than its peers.

NICK TRAIN: And that’s made it very vulnerable to concern about the dollar and U. S. Consumption during this period. Actually, on our time horizons, whether or not we deserve those time horizons, I don’t know. But from our time horizons, the fact that this business derives half of its profits from the world’s most dynamic. Rapidly growing economy with the best demographics, that’s a huge strategic advantage, it seems to us.

SPEAKER 7: You said the temporary weakness of the dollar. Do you think that weakness is temporary? Do you…

NICK TRAIN: I perhaps meant contemporary. I meant it was happening now.

SPEAKER 7: Do you take a view on those sorts of things?

NICK TRAIN: Not really.

NICK TRAIN: Certainly not a timing view, but, you know, I… I know that sterling has fallen 95% against the US dollar since the American Civil War. And I see no reason why that very long-term trajectory shouldn’t continue.

NICK TRAIN: I think it’s interesting. To me, it’s interesting that many of the holdings that we own have substantial dollar businesses or dollar revenues. And I… That’s not a deliberate search for those heavy dollar revenues. But I think it’s showing that businesses have got what it takes if they’ve been successful in building a business in the United States because it’s the most competitive dynamic market of all.

NICK TRAIN: So, you know, we’ve got this big holding in Experian, you know, listed on the London stock market, world’s biggest… Biggest credit rating agency. And it’s also the biggest in the United States. And it’s winning in the United States. That’s really, really interesting. Now, there are current, you know, pressures on the US economy and currency has been weak, but still a nice endorsement of that franchise, I think.

STEPHEN CLAPHAM: So you’re in your mid 60s, I’m guessing. And I wondered… You know, you’ve got this sort of forever strategy. How long will you carry on doing this and what keeps you doing it? I mean, you don’t need to do this now. You’ve made…

STEPHEN CLAPHAM: Is it still fun?

NICK TRAIN: Yeah, yeah. It’s…

NICK TRAIN: I said to you right at the outset… That the ambition was always to build really long-term track records because those were the people I admired that had the really really multi-decade track records that’s not I understand it is a privilege and it is a performance industry and maybe you mentioned Vivian Bazalgette I always remember Viv saying to me, you know, Being a professional investor, it’s like riding a tiger.

NICK TRAIN: It’s not a case of if you’re going to get thrown off its back and mauled to death. It’s just a case of when. And I’m so pleased with myself, not particularly with recent performance, but to still be doing it now.

NICK TRAIN: I couldn’t imagine anything else that I would have wanted to do. And to have had the experience i’ve i’ve had it’s been very very fulfilling i i i i’d love yeah the compounding which is going on in the portfolio to continue and for value to be released and for returns to be generated for clients.

STEPHEN CLAPHAM: Is there a succession plan i mean you know you’re very much the face of lindsay Train and the investment trust.

NICK TRAIN: The short answer is yes. We’ve hired over the years a team and they are now of an experience and an age where they are both influencing the shape of the portfolios and the constituents of the portfolios. And they’re also of an age when they need to be taking more responsibility for the portfolios. And that’s a challenge for our company, but it is happening.

NICK TRAIN: And my ambitions are still very much for the returns that I aspire to generate. But I also have ambitions for this group of people who are younger than me. Let’s put it that way. They’re not necessarily so young anymore, who’ve apparently committed their careers to our business. I would love for them to be able to demonstrate how smart and… Competent they are.

STEPHEN CLAPHAM: And it’s been a pleasure talking to you. I always end by asking people to recommend a book, particularly a young person thinking of entering the industry. Is there a book that you’re fond of?

NICK TRAIN: Well, there is. I haven’t read it for a while. I expect it will seem rather they’re out of date now, but I have to table. The Hagstrom book, The Warren Buffett Way, because it did have such a big influence on me and my career.

NICK TRAIN: I think it, with wonderful clarity, takes the principles that have been shared and shows how they can be applied. And as I say, I’ve not read it for a while, but I find it hard to believe that it still wouldn’t be. Of use to anybody who was interested in testing their metal in capital markets.

STEPHEN CLAPHAM: No, absolutely. It’s a great book. He’s a very interesting guy. Have you ever been to Omaha?

NICK TRAIN: I’ve not. I’ve not. No. Some of my colleagues have, but I haven’t. No.

STEPHEN CLAPHAM: I’ve seen him speak at Guy Spear’s conference the day before, and he’s spoken the last two. Quite an interesting speaker, but the book is very good. And it’s interesting because I don’t think I should, somebody said to me the other day, I should have a page on the website with a list of all the books that have been recommended, which is a task that you would hope that you could just say to AI, just go through.

STEPHEN CLAPHAM: And I thought, I have tried, and I’m still trying to make that work. But one day I will be able to say, oh, how many people have recommended that book?

STEPHEN CLAPHAM: But I think you’re the first. Listen, thank you so much for doing this. I normally ask people where they can be found, but you, I imagine, don’t have a social media presence, but the firm’s got a website and will direct people there in the show notes. Thank you so much. All right, thank you.

NICK TRAIN: I hope that’s of some use to anybody, someone.

NICK TRAIN: Very good.

STEPHEN CLAPHAM: I’m so glad Nick took the time to have this conversation as I learned a lot. Particularly from his humility about his recent performance. He makes almost no effort to sell himself, but professes a hope that things will turn around.

STEPHEN CLAPHAM: I hope so too, as Nick Train is one of the most thoughtful investors I’ve encountered, and he has a seriously long-term attitude. He is one of the best examples of doing something different to generate above-market performance. I hope you enjoyed this as much as I did. Thanks for listening.

STEPHEN CLAPHAM: Thanks for listening. It would mean a great deal to me if you could please share this with one friend. And feel free to spread the word by subscribing or even leaving a review on Apple Podcasts or Spotify.