HOW STEVE KNOWS THE GUEST

Steve met Tim at an event put on by the UBS Holt team which held a round table on future developments and was struck by his common sense wisdom and no-nonsense approach and persuaded him to come on the podcast. Thanks to UBS Holt for allowing us to make that connection.

Contents

00:00:00              Welcome to the Podcast and Important Disclaimers

00:02:39              Meet Tim Guinness: Five Decades in Investment Management

00:04:01              Tim’s Unconventional Path: Engineering, MIT, and Early Career

00:07:07              How Computer Modeling Shaped Early Investment Management

00:09:19              Tim’s 30-Stock, Equal-Weighted Portfolio and Sell Discipline

00:14:01              Value, Quality, Earnings, and Momentum: Tim’s Stock Picking Rules

00:19:20              Why Balance Sheet Gearing Remains a Critical Investment Metric

00:23:01              Identifying Long-Term Themes for the Innovation Fund

00:26:26              Navigating Company Culture, WFH, and the 2008 Financial Crisis

00:33:55              Behind the Balance Sheet Newsletter and AlphaSense Research Tool

00:36:09              Tim’s Insights on Oil Demand Peak and Fossil Fuel Transition

00:42:49              Debating the Potential and Challenges of Wind Energy in the UK

00:47:08              Why Active Managers Can Still Outperform Passive Indexes

00:50:47              The Future of Asset Management: Platforms and Intelligent Indexes

Transcript

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.

0:36

Of what makes a successful?

Investment, or indeed an unsuccessful one.

Our goal is to inform, educate and entertain.

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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.

1:00

Nothing in this podcast should be construed as investment advice or relied upon for investment decisions.

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2:36

It’s a tool I highly recommend.

Tim Guinness left university in 1970, so he’s been in business for over 5 decades and he’s been managing money for 44 years.

Tim has built up two asset management firms.

The first one he sold, and the second now runs $11 billion and has 85 people age 77.

2:58

Tim’s still thinking about how to grow that business and importantly, as he explains how to secure its future.

In our conversation, he discusses why it’s not difficult, in his view, for active managers to beat the index even today.

Why he still likes to look at balance sheet gearing, which has become rather out of favor, as a measure of indexedness.

3:21

Why he thinks oil demand will peak in the next five to seven years and what will happen thereafter.

Why his firm holds 30 stock portfolios and equal weights them.

And Timmy explains the four criteria they used to pick stocks, volume quality, earnings improvement and stock momentum.

3:41

It’s a great privilege doing this podcast.

I get to pick the brains of people who have been around even longer than I have, and I never failed to learn something from young and old alike.

Tim has vast experience and I hope you 2 will take.

3:57

Something away from our interesting conversation.

So Tim Guinness, welcome to the podcast.

I’m really looking forward to our conversation.

And I always start by asking people, did you always want to be an investor?

But I’m guessing you didn’t because you studied engineering at Cambridge and went on to MIT to study management science.

4:18

And that must have been in those days, we’re talking 50 plus years ago.

That must have been very, very unusual.

What was behind that?

And then how did you get into investing?

Right.

Well, if I give you the background, I I never particularly wanted to be an investment manager, as you rightly say, I read engineering, but I always had the mindset that when it came to investment management I would do it myself.

4:48

And why was that?

Well my father who had had a very interesting career and had been a farmer in Kenya and then got into rural electrification in England, he was an investor himself.

5:04

He was on the board of an investment trust, the London Electrical and General Trust, and after the war he was keen on investing in companies like Florida Light and Power.

And so it was in my mind.

But I didn’t intend to be an investment manager.

5:23

Why did I go to MIT?

Yeah, it was.

That would have been unusual in those days, right?

American University.

Very.

There was a very small cohort of us there from England, but there wasn’t one or two others.

I think the short answer is I met a man, my, my father’s lawyer invited me up to Scotland for a week’s holiday.

5:47

And one of the other people on the holiday was his daughter’s husband.

And he had just been to MIT at to the Sloan School of Management.

And he said, I said, what’s that?

And he said it’s a Business School.

What’s that?

Oh, that sounds interesting.

6:02

Now I was approaching, I had one more year at Cambridge and my father wanted to be an accountant.

I think the only thing I can say without any qualification is I did not want to be an accountant.

And so I thought, well, Business School, that’s for me.

6:18

I applied to MIT, Harvard, Stanford.

MIT took me.

The others wanted me to have five years experience.

I wanted to go straight from Cambridge.

And the only problem was it was quite expensive.

Now my father had stupidly given me a little bit of money, not much, but it was enough to pay the first terms fees.

6:40

And so I paid the first terms fees and then I got a research assistantship with a professor.

We were cleaning up Boston Harbour.

And then the second year I got a, a teaching assistantship with the professor of accounting and I was the teaching assistant for accounting one O 1 and one O 2.

6:56

And I can tell you that was a brilliant teaching assistant role.

And I well, I reckon I know more about how to read report on accounts than most accountants.

Right.

Well, you’re in good company here because that is one of our specialities.

7:13

But so you you started in corporate finance and then you ended up running the investment management side of that that business.

How did the the sort of the engineering and the management science experience, how did that help?

I think the first thing I would say is when we’re looking to recruit graduates, if I come across a graduate who’s got an engineering degree, that puts them right to the top of the class.

7:40

Engineers are all about decision making under uncertainty.

Engineers can also cope with numbers and statistics and all that sort of thing.

And these are important when you come, in my opinion, to analysing the numbers behind a company’s performance to date and potential performance in the future.

8:03

And perhaps I should explain that, that when I came back from MIT and at the at the merchant bank I went to, they, they’d hired me because they wanted someone who’s good at computer modelling.

And computers were quite new in those days, of course.

So we’re talking what year is this?

This is 1970. 1970.

8:20

And another thing I might mention is that as at MIT, I did write my master’s thesis on the use of information technology in investment management.

So it was always an interest of mine, but not, not not going to be my career.

8:40

And what was the thesis about?

I mean that was you could use computers to help you analyse data.

Precisely there there was a there was a professor at MIT called Arnie Amstutz, and he was right at the cutting edge of using computers to to basically process data.

8:57

Oh, interesting.

I mean, it’s hard for a young person listening to this podcast to imagine a world without the computer in your pocket.

That’s right.

And we didn’t have that then, by the way, we used to have to go into the main, the main block and and and it was time sharing.

9:14

Punch cards.

Punch cards, Yeah, it’s.

Cracky.

It’s all changed.

So today your eponymous firm, Guinness Global Investors runs concentrated portfolios, typically 30 equally weighted stocks.

9:32

And I just wondered, I would like to talk to you about your investment philosophy and maybe how that’s changed over the years.

But why 30 stocks?

I mean, is this just long period of experience That was the the, the optimum number?

9:49

What?

Just run me through how you got to here.

OK.

That’s a good example of how MIT had an effect on me.

I know one of the things that we were, I was listening to a course and they were talking about stock specific risk and how you can diversify A portfolio sufficiently that stock specific risk becomes an acceptable level of risk.

10:15

I mean, these are all subjective obviously.

And the opinion of this professor was that 20 stocks, 20 equally weighted stocks would diversify A portfolio enough.

And so in fact, when I started my own company, we had 25 stocks and we moved to 30 or 35.

10:37

It’s slightly more comfortable with that.

But the background to it is, is how do you diversify stock specific risk efficiently and then have a small number of the best companies to invest in?

Because that was my mantra.

And the, the equal weighting, I mean, that’s quite controversial.

10:56

I mean, I, I can understand we’ve had other guests on the podcast, Jen, Jennifer Wallace has a similar philosophy.

She likes to cut the exposure because she, you know, if you’ve got a, a quite narrow portfolio, then you, you, you don’t want to have too much riding on a single stock, but you’re cutting your winners, aren’t you?

11:17

Yeah.

The, the, the, the first thing is there has been some academic work done on this.

And when I looked at it 20 years ago, it demonstrated that over 4 decades that they looked at it in three decades equal weight had outperformed market cap weight.

11:39

And in one decade, that was the 1990s, market cap weight had outperformed.

Now that’s just, it’s not completely irrelevant because we’re dealing with concentrated portfolios.

And, and that of course was looking at, you know, a large stock, large number of stock, 100 stock or 500 stock indices.

12:00

But my other basic principle is that, you know, people are quite bad at, at, at buying and selling.

And you know, the trend is my friend is a mantra that, that, that some of the fund managers use to great advantage.

12:16

But very often they’re bad at selling.

And so the trend is their friend for a bit and then whoops, it goes wrong.

Mine is a much more simple approach.

Find your, your, your 30 best troops and stick with them.

And, and then we, we change them out and, and we’re A1 in one out.

12:33

So we, we, we, we don’t, we don’t buy little small holdings or slowly build them up.

We, we buy a stock and then, and then when we come to sell a stock, we put one in to replace it.

And another thing I would say is that fund managers are bad at selling.

12:51

And so and so and so one of the benefits of my approach is that when we come, when we, when we come with a stock that we really like and the rest of my team say, well, we, we, we haven’t got one to sell to them.

We like all the others.

I said, no, we just have to find the one we like the least of all the ones we like and, and then we sell that one.

13:09

So it’s it’s a good for the sell discipline.

So is it more often that you’ll that you’ll sell something because you got something good to buy or does?

It yes, yeah, that’s actually the process.

I, I think, I think that is that that is psychologically true.

13:27

But we do have, we try and implement a cell discipline of looking at our portfolios once a month.

What are the best performers over the last one and three years?

What are the worst performers?

Should we be selling the really good performers because they’ve not got pretty fully valued?

13:45

Should we be selling the really bad performers?

Could we just made a mistake?

And I mean, typically you sell something which you made a mistake and or something’s gone wrong with the.

No, I wouldn’t say I wouldn’t.

No, I wouldn’t say typically.

Typically will sell something because they’ve done very well and we think they’re now fully priced.

Right.

14:01

OK, but I mean, it does happen that things go wrong, right?

Very rarely.

No.

No, of course it does.

I and you, I looked at a letter from quite a few years ago and it talked about you screened in four criteria, value, business quality, improving results and improving stock price.

14:27

And it’s very unusual to see an investor talking about using momentum.

And it’s very funny because I’m bumped into Nick Glidden who is the #1 technical analyst, chartist in the UK.

14:44

And Nick and I used to work together.

And he says, you know, it’s just momentum.

It’s always work, always works.

It’s the best thing and you know, that’s all you need to know is momentum.

But nobody will knowledge.

14:59

Professional investors think that their clients will get upset if they think that they’re just using charts.

Obviously not just using charts, but talk to me about how that methodology was developed and how that has changed over time.

15:15

And how important is momentum?

How important is the technical side?

I, I think, let’s just step back a second.

We have these four factors and behind that lies a concept that the problem that investment managers face is a data glut.

15:35

There’s just so much data right there.

And we’ve got to try and filter down the companies that we’re going to look at to a relatively small selection.

And from that small selection, we will select the 30 equally weighted stocks that we want.

Now I believe, but this is hypothesis rather than absolute fact, that if you if you select is the stock, does it appear to have a good value?

16:05

Is it a quality company?

I its return on capital in the recent years is consistently pretty satisfactory.

And does it have momentum as an example as an, as another factor are and we have the 4th factor, which is sentiment like I’ll come back to that.

16:27

You’re, it’s just a way of, of getting a company that ticks 4 boxes.

Now we don’t, we use this screening approach to produce a universe.

I think it’s then probably true to say that it’s in there because it’s got good momentum.

16:43

When we come to take the decision of let’s say we’ve, we’ve, we’ve we’ve slimmed down the universe from 8000 stocks to 80 that went out focused on because they score well in our screening process.

Probably their momentum is not a particularly important factor for going the last mile, going the last mile.

17:03

We do a deep dive into the numbers.

And how?

And and look at the macro too.

And the valuation, I mean, how do you approach valuation?

Because it’s a very complicated, very complex area and, and a lot of professional investors listen to this.

17:23

Everybody does it a different way, which I always find quite amusing.

OK.

We don’t have one way I believe in pattern recognition you’re you’re trying to recognize a stock that appears cheap on multiple metrics and don’t over rely on one.

17:41

However, we started in our screening process, we, we, we look at a, it’s a sort of, it’s a cash flow discount model.

So you, you, you project the cash flows of the companies you’re looking at and that’s what computers do for us.

18:01

And we give them rules and they, and they just project the profits maybe using earnings estimates for the first couple of years, then a bit of mean regression and then another meme regression over the next 30 years.

And that gives you a cash flow because you’ve also looked at things like CapEx and how working capital is changing and you discount that cash flow back.

18:21

And that gives you a metric of the value of the company.

And the the one of the key things is what discount rate do you use for that?

Well, some Americans came up with a very clever idea.

You’ve you, you apply this system to the whole of the US market and then find out what discount rate discounts the whole of the market back to its current valuation.

18:40

Yeah.

Anyway, that’s that, that’s what we use in our screening system.

We then look at that value.

We look at price, earnings ratio, EB to EBITDA, price to sales, all of these metrics and and we particularly look at how those metrics have trended in previous years.

18:59

And and then you, as I say, it’s pattern recognition that that sounds rather a vague phrase, but you’re, you’re looking you’re looking at these five different metrics.

Oh, it’s scoring quite well on all of them.

Yeah.

19:15

We like that or No, that one’s weak.

Does it matter?

You know.

Yeah, no, of course.

And when we met, so we met at UBS alt event where we were discussing how Holt was used.

19:32

And you made this remark which really struck me that you, when you look at a company, you always look at the balance sheet gearing.

And I said to you that it’s been, I don’t know, 15 years since I heard anybody outside the property sector talk about balance sheet gearing.

19:52

Tell the audience why you think that is important and useful.

Well, I guess why I think it’s important is I have lived through at least two serious banking crises, 1974 and 2008.

20:17

We, we had an Asian crisis in 1997, which some of it was banking related.

And I somewhere along the line, I, I found myself looking at debt to equity and total creditors to equity and, and equity.

20:45

The equity metric I always use was net tangible assets.

I, I knocked off the goodwill and I, I observed that when a, when a company had total debt and creditors to, to net tangible assets exceeding 2, you had to watch it carefully.

21:10

If the debt to equity debt to net tangible assets gets above 50 or 60, you just have to be careful.

So I think, I think we answered your question.

Is it this is this is perhaps personal to me and but my experience is when you you’ve got to, you’ve got to know things can go wrong and what companies will sail through and what went, which went.

21:34

And so you tend to are you, do you tend to avoid indebted companies in in the funds or you’re happy to own companies with moderate level of debt and.

I’ve sometimes income companies with a very high level of debt.

21:49

I can, I can, I can, I can remember buying a company that I thought was very cheap.

Well, I’ll tell you what it was.

It was it was Peabody and and Peabody had been was a coal.

How did talk about a coal company these days?

But anyway, this is this is quite a long time ago.

22:08

And it had been owned by Lehman And I think they then they then they bought it in then they’d flooded it off.

They’d flooded it off with a lot of debt.

And one of the things I’d noticed was the oil price was was going up steadily from 25 to 35 to 45 to $55 a a barrel.

22:24

And the coal price was actually following that, but with a lag.

And I could see that Peabody was gonna have, you know, growing revenue for the next two or three years, almost certainly.

And, and the fact that it was highly geared attracted me because in fact, we were going to get a double whammy because we’re going to get the benefit of the gearing.

22:45

So gearing can provide a benefit.

But on the whole, when, when we’re doing our screening for stocks, there’s a bit of a, there’s a bit of a red light.

And and for our quality funds, it would be an important factor for our growth year funds it might not be.

23:01

No, sure.

And you’ve you’ve got an innovation fund with 9 themes used for stock selection like AI, clean energy, robotics.

And I was looking back in 2007, you owned Amazon, NVIDIA, Netflix and Microsoft.

23:18

I bought all of those.

So you you should have just gone home.

Exactly how?

How do you identify these long term themes and, and do they change?

I mean, I know they’re a long term, but how do you decide what, what are the themes?

23:35

And are there points in the cycle that you think, well actually we should downplay that theme?

And how does it, how does it work in the fun?

The themes are, the themes aren’t core.

23:53

The themes are just a, a way to achieve an objective, which is to try and find innovative companies.

And when we started the fund, we, we had a, a different approach.

Word magazine had an index called the Word 40 index.

24:09

That was, I think, I think this was set up in 96.

I think we in fact launched a fund that that tracked that index.

And, and when and when we, when I set up my new company, I actually bought from the, the, the, the investor who’d bought my company, I bought the, the US operation that I had set up.

24:33

What if it was 15 years earlier and it had this fund in it And, and we decided that we didn’t want to run an index fund and we were going to take it, make it active.

And so how are we going to do that?

But I thought we’ll look, we’ll look at all the stocks that have been in the index or are in the index now.

24:52

And that were there about 70 of those.

And this was a, this was a, an index of innovative companies, OK.

And we’ll choose the thirty that we think meet our screen and, and the best value.

And so that’s what we did.

And then after a bit, we’d stop publishing the index.

25:10

And so we then started looking at Boston Consulting, had a list of the 100 most innovative companies, I think MIT Media Lab.

And then we came up with the idea of maybe we can do it ourselves and come up with a slightly wider index by looking at these themes.

And you say, how do we, we will change the themes.

25:29

You know, when a new theme comes along that we think needs attention, we’ll add it.

And and if a theme we think is no longer at the cutting edge of innovation, we’ll we’ll take it off.

And I mean that means perhaps that you get very over concentrated in in particular sectors.

25:48

We.

We.

I.

Mean you’ve got equal weighting, but you have rules about sector concentration.

No hard rules, common sense rules, but but you know, it’s this, this fund has had sort of in 4045% in, in information technology and, and, and computing of one sort or another.

26:13

And and I should explain that this particular fund invests not just in the people who make the technology like Microsoft, which you mentioned, but also companies like Netflix and Amazon that are using it.

No, Sure.

Yeah.

When we were walking over, we were talking about the the culture and you were saying that you go into office most days, but not everybody does.

26:41

So how has it been?

You know, the working from home thing, you don’t have a rule that everybody has to be in office like many companies are doing.

Most investment firms that I speak to, most of the people are in office.

But you you’ve had a slightly different experience.

26:57

I think we’re a small company.

How?

Many of you just for the. 8585 I mean, when, when I started, we were just three.

So, so we have grown a bit and and I and I and I, and I think just just going over the tangent for a second, you know, one, one of our mantras is to try and create an an agreeable environment.

27:22

That means trying to have people who are hard working, total integrity, intelligent, but also agreeable.

And I think there’s an element of, of we trust people to come in to the office the right amount of time that may or may or may not turn out to be correct, but it’s where we are at the moment.

27:46

And So what what we are, what we are, what we are finding is that the staff who are aged between 22 and 35, they’re the ones who come in more than anybody else.

28:06

They want to learn.

Yeah, they want to learn and, and we also find people over 55 are often quite comfortable coming into the office.

And it’s the 35 to 55 year olds who sort of know, think they know what they’re doing and, and, and are pretty happy working from home.

28:26

We, we’ve obviously been working on trying to make sure that the, the sort of schedule and process of teams meetings and, you know, meetings online to an extent seeks to, to step in and, and deal with the gap that’s otherwise left because you don’t, or meet people at the coffee machine.

28:49

And we are where we are.

And, and, and we and we, we may adapt.

Yeah, I’ve got, I’ve got, I should just mention that one of one of my younger team members who, who, who, who thinks the older ones should come in more.

29:06

He he he’s come up with the idea of a of a new a new fund that only invests in companies that require their staff to come in five days a week.

And how is the back test?

Looking No, we haven’t done that yet.

It’s quite funny, I you, but you’re, you’re, it hasn’t been sort of plain sailing from three people to 85 because in the global financial crisis, you, you lay some people off, didn’t you?

29:37

Yes, we, we, we.

How was that?

I mean, that must have been difficult.

Well, I, I, I ended up only one person left us.

I, I, we, we were only, we were only 12 people in London at the time and, and four in America.

29:54

And I got the 12 team into the room and I produced a chart or two and I said, here’s the problem.

Our revenue has gone down really quite a lot.

Just how much did your assets fallen?

30:11

Well, I need to add 1 extra bit to the picture because I had another problem in, in that our, our biggest client which which was I had been running an energy fund for Investec And when I left it and Investec was the company that bought my business.

30:30

And when I left them totally amicably, it was sort of agreed in advance that I would leave after three to five years and hand over to the very good South African team that had come up from Cape Town.

And so, so when I did that, they were happy for me to go on running an energy fund that I’d started running in 1998 when my colleagues wanted to close it because it was too small and had a very bad performance.

30:56

Guess what, It was the best performing fund over the next 10 years.

But that’s another story anyway that, that, that little fund I built from $3,000,000 to 1.9 billion.

And in 2007, to get to the point here, Investec said, I’m very sorry, Tim.

31:12

We’re, we’re now going to take it in house.

We’ve got we, we’ve expanded our energy team.

We’ve got some very expensive recruits from Goldman Sachs and we need to take it back.

And so that was quite a big drop.

So my assets dropped from 2.8 billion to 900 million.

31:27

And then Layman comes along and they go bust carelessly and that brings our assets down to 400 million because markets are tanked, tanked.

And so I, I get everyone in the room and I say, look, we’ve got this problem revenue, I mean assets under management down.

31:43

Admittedly, the Investec fund, we weren’t paying, we weren’t receiving huge fees for that because that was a subcontract advisor.

But nonetheless our revenue has, has has dropped.

And here’s the problem, these these three lines are marketing and sales costs, overhead costs and staff costs.

32:02

And that’s you by the way.

And I can cut the sales and marketing down to nothing overheads we can slowly reduce.

But you, I’m told by HR that I can’t, I can’t halve your pay.

And so very sadly, I’m making 10 of you redundant.

32:18

And here are the letters.

But I just want you to know I will be recruiting on Friday, this was Wednesday, 10 people to replace you and I will be offering them half, half what you’re currently paid.

And if you want, you can apply.

And then on Friday, I said to one of them, I said, Will, are you, are you up for this?

32:36

Oh, yes, Tim, I think it’s a really good idea.

Oh yeah.

And so nine of the 10 applied on on the half pay.

So, so we halved their pay.

The 11 lady who took redundancy, she didn’t get a job for 17 months and she only got 3 months redundancy.

32:53

So she and all the people who accepted half pay, by the end of 15 months their pay was back to where it was because assets had recovered.

That’s very, it’s very funny.

And that was a very, it was a good bonding.

It was a bonding experience, I think for everybody it.

33:10

Must have been painful to take 50% their cuts and pay.

But I, I do know of other firms where people were asked to work for nothing.

And so and with that, you know, obviously it’s a geared business asset management.

33:30

I think, I think that’s one of the things that that’s perhaps worth saying.

If you look at asset management companies and their accounts over 10 year period, you can see that their profit margins may be average 30%, they can go up to 60% and they can go down to 0 just as the assets move up and down.

33:48

And when you have a big, you know, if you have, if you have a bear market, assets can easily go down 40 to 50%.

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34:07

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36:06

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On the energy fund, I mean, you’re a bit of an energy expert.

Why energy and what investors get wrong about energy supply and demand?

Because it’s quite a straightforward sort of it conceptually, but it’s an incredibly difficult sector to to invest in so.

36:31

How did I get involved?

I think I mentioned my colleagues wanted to close the fund.

Yeah, yeah.

And I said no, no.

And I said, why can’t someone else?

But you don’t have any particular expertise in energy?

I had no expertise.

In fact, I said is there not somebody else who can run it?

No, no.

Why not?

They all want to run dot dot com funds.com funds, Tim.

36:51

I said, OK, I’ll run it.

Oh, no, you can’t, Tim.

Why’s that?

Well, you don’t know anything about it and you’re the chairman.

I said, oh, I’ll talk to the chairman tonight in my bathroom.

So the chairman and I had a chat.

He was in the mirror.

So I decided to run it.

And, and I, after about six months, I became absolutely fascinated by it.

37:10

All right.

I, I, I, I, I read a wonderful book by Daniel Jurgen called The Prize.

I don’t think you ever read that.

I would recommend it to anybody.

And so it’s a, it’s a sector where macro developments are, are, are very important supply, If you look at supply and demand for any of these things, oil, gas, coal, whatever you like.

37:44

We’re going, we’re going back to the fossil fuel here, fossil fuel era.

But you can talk about electricity too.

They tend to grow quite, quite steadily.

And then what happens is small amounts of oversupply or small amounts of undersupply can create a big spike.

38:00

Yeah.

And you then have to look at each of the sources of energy, whether it’s coal, gas, oil, and now nuclear.

And then we can go onto renewables.

If, if, if there’s, if there’s a surge in output because an Iran war has ended and the Iran production had been right down and now surges all the same with Libya.

38:30

And there’s a lot of politics in the background or in America.

I’m, I’m focusing more on oil now.

We’re dealing with the fracking and, and suddenly fracking works and, and, and the supply, it begins to grow quite rapidly.

But that’s what you have and you have to be interested in that.

38:48

And I and I was.

And I mean, what do you think about it now?

So we look at oil, for example, there’s been massive underinvestment in in new resources.

And we had Jeremy Hosking on the podcast maybe three years ago.

39:05

He was talking specifically about energy and the lack of investment and also about the whole ESG thing.

These people were discouraged from owning the stocks, so they became very cheap.

But it it it.

Does look like US shale may have peaked and that looks to me like a fantastic set up is that is that right?

39:33

Whether shale has peaked, we will see.

Certainly there have recently been statistics about how the the amount of tracking activity it it has come down off quite, quite materially from its peak.

39:53

That may also be influenced by the fact that, of course, the oil price has come down.

Yes, no, of course.

And these are all factors, big picture oil.

Oil demand, I believe will peak in the next 5-7 years.

40:14

And we’ll, and we’ll then start to decline steadily at 1 to 2% a year.

And so we, we then you’re right, we then have to focus on the areas of supply and, and certainly the, the amount of offshore drilling is fantastically reduced from what it was, but, but shale has kept it up.

40:36

We’ve also had, you know, quite a lot of OPEC supply still offline and that’s coming back on.

And so I don’t, I don’t have a, a simple answer.

My, my gut feel is that the thing that you’re alluding to, eventually we just turn off producing more supply.

41:01

And so actually the price may remain quite strong.

And that’s not a bad thing, funnily enough, for people who want to see electric vehicles profligating because if oil became very cheap, you’d have another headwind in the in the oil ice cars would be if that’s internal combustion engine, sorry, cars would would have a longer life, you know, sorry, a longer enthused people will be more enthused to buy them if petrol was very cheap.

41:32

I’m I am completely big picture.

We are, we have used up, we are using up our fossil fuels in the blink of a geological eyelid.

We’ve got to face up to the fact that we need to move to solar, wind and nuclear and a bit of geothermal.

41:52

Maybe we’ve got to think about hydrogen and and so on.

So I’m completely in that camp.

I’ve, I’ve become, I’ve I’ve transitioned from or tried to transition from being someone who knew a lot about the oil and gas industry and was fascinated by it, to someone who is trying to know quite a lot about the renewable sector and is fascinated by it too.

42:14

We had Barry Norris on the sort of sister podcast, which is called Beyond the Balance Sheet.

I’d done a few with Hugh Van Stenis and we had Barry Norris on Talking about the, the economics of wind in how crazy it is to throw more money in the North Sea when we’ve got as much wind energy as we need.

42:39

And he had this fantastic phrase, he termed the, the wind power unreliable workers because he didn’t turn up for work everyday.

Do you have a view on that sort of the UK phenomenon where we’ve we’ve been paying very high prices for energy, has been guaranteeing these renewable prices and we’re still and we’re building more and on a windy day we’ve already got enough wind, windmills this is.

43:10

The argument I I OK, let me go.

I I I would like to pick your man up on about 5 different points and.

I and I probably I’ve probably inaccurately summarized.

Well, well, I I, I, I I I am in completely the opposite camp.

43:29

Oh.

Interesting.

OK.

And perhaps I, I can, I can, I can remind him that that windmills have been around for a long time.

And, and in the old days, and if you go to a place like Cyprus, you’ll, you’ll see windmills all up and down the southern coast.

43:48

And, and, and they used them and they, and they would process, they would mill and create flour when the wind blew.

And so we we will have to adapt to using some of this electricity when it’s available.

44:06

But he is completely, in my view, underestimating our, our ability to build infrastructure to store energy or to use the electricity that wind generates when we don’t need it to generate hydrogen, for example.

44:26

And now I, I, I believe we have, I mean, completely opposite camp.

I believe we have in the North Sea a huge wind resource.

And, and that the, and the reason for that is the wind is strong.

44:45

The North Sea is quite shallow.

You’ve got, you’ve got an area at the Dogger Bank.

This is that that is 82% the size of Wales, which is very shallow, sort of 30 meters.

You’ve got the the the southern half of the North Sea, which includes that, but the rest of it, it’s shallower than it’s 7, it’s 60 meters and we can still still build ground built wind turbines with and they are the the shallower the water, the cheaper it is to build the North Shore wind and and and then again in the north, in the north half of the North Sea, we’ll have to have floating.

45:20

But my point is that we could easily see and I think we will see wind capacity go up tenfold and we, we will.

And I and I by the way, I do want to build more nuclear because we definitely need we, we need to have maybe 40% of our electricity coming to nuclear baseline from there.

45:47

Well, I’m, I’m hopeful that the uranium price will will.

What and I and and I wanted to pick him up.

I want to pick up one other thing he said about the the, the the high price.

We’re not paying a hugely high price for, for, for for wind.

You know, you’re, you’re you’re talking about what I do it in P pence per kWh.

46:04

We’re talking about £0.60 per kWh.

Sorry, 6 pence per kWh.

That’s not very expensive.

And the reason why electricity is so expensive is that Ofgen, I think they’re called a pricing it off the gas price.

Yeah.

I I was paraphrasing.

46:22

That, yeah.

My concern is that UK energy prices are very high.

So am I I’m concerned about that.

We should bring them right down.

We should bring them, you know.

And that wasn’t that.

That wasn’t Barry.

I don’t want to get Barry calling me up and telling saying I mis supported them, but it’s a very the whole area I think is is incredibly interesting.

46:47

I don’t think we’ve necessarily done as good a job as we might have done in the UK government, but clearly the cost of battery storage is coming down very, very aggressively thanks to the Chinese, and that makes a.

Huge difference these new sodium out batteries may be may be a big leap.

47:07

We’ll see.

But we’ll see now when we’re walking over, we’re talking about index investing.

And I was going to ask you, has the shift to passive investing made it easier or harder to generate alpha today?

47:23

You made a very controversial comment on the walk over.

Well, I, I, I can’t remember which one was controversial or that you’re remembering.

But anyway, first thing I’m saying is indexes are stupid, which they are.

Secondly, obviously you’ve got to take costs into account.

47:41

So, so, so, so, so there may be an argument that active fund managers to have to charge less, but but, but imagine there were no fees.

Half of active management funds would outperform index funds and and half would underperform.

That’s just that’s just the the maths of it.

47:59

Indexes will just be in the middle.

They’re stupid in the middle and not the.

Case though is it?

Well then when you add costs in, it may be only because again the maths is the same, it may be 33% of active funds outperform, but it, but in my view, if you are thoughtful about it, it is not difficult for an active fund manager to outperform an index.

48:25

And we, we, we, we touched on this earlier.

There, there will be, there will be phases when very large market cap stocks as a group perform extremely strongly and and that may appear to show that indexes outperform passes, but these are relatively short term periods.

48:46

So.

On the historically, the argument always was that actually the very largest, the the highest market cap companies would tend to underperform because their capacity to grow anymore was much less than than a smaller medium sized company.

49:03

What’s what’s happened just in the last 20 years is some of the advances in technology and so on have made it possible for very large companies to go on growing share Yeah, Amazon’s a classic example.

But there’s no reason to think that’s going to stop, isn’t there?

49:22

Yes, eventually all, all good things come to an end.

They will, you know, we, we, we, we, we will, we will get to some stable level where people shopping through Amazon that, that it, it’s 66% or whatever the percentage is.

And then, and then, and then it’ll, and then, and then they won’t be able to grow.

49:45

Whereas some nippy, you know, retail store or, and there will be other, other, other competitors with Amazon that may have an angle that Amazon hasn’t got.

Amazon’s got the advantages that it’s, it’s, it’s got a very large range of, of, of stock, but you’ll get specialist firms coming through and building market share, I’m sure.

50:04

And it doesn’t concern you today your ability to perform when the Amazons and videos and of this.

No, no, no, not at all.

But it’s not easy.

50:23

I think I meant very easy.

Sorry, sorry.

No, it’s not easy.

Of course, it’s not easy, but if you, if you, if you intelligently look at the universe of stocks out there and identify those that are, you know, good value quality with a bit of a bit of momentum and, and sentiment improving sentiment, you’ll, you will, you will succeed.

50:47

OK.

Well, so that’s the four rules you need.

If you were starting today, would you do anything differently if you were, if you were starting your Business Today?

So you’ve set up two asset management firms in your career?

51:09

Yes, I, I think that and we will evolve our, our firm potentially in the direction that I’m now going to touch on the landscape out there for distribution of investment funds and products has changed beyond recognition from when I came in to the industry.

51:42

You may or may not, you know, remember, you wouldn’t remember the 70s, but people were, were, were, were, were selling funds by placing large advertisements in the national newspapers.

And you would, you would clip out the coupon, send it, send it in.

And you know, the fund manager and, and these, these would have been companies like Save and Prosper and M&G would then communicate with you directly by mail.

52:08

And, and they had a genuine customer base that were their customers.

And now firms like us, a lot of our customers, a majority of our customers are, are intermediaries who sit between US and the final customers.

52:27

They might be a platform, they’ll be wealth managers, their IFAs, their Sparkasm in Germany, you know, and, and then there’s always the risk to us down the line that those organisations decide that they’re going to prefer passives or that they’re going to launch their own funds and cut aside.

52:48

So I, I want us to move into the platform business.

Oh, really?

I, I potentially want us to move into the wealth management business.

All right.

And that might not be what you, what you expected to hear, but that is, that is sort of what, what’s in our mind.

53:10

And by the way, we were talking about the, the pros and cons of index and active, but I’m, I’m not stupid.

And, and and I’m, I’m also, you know, in my head is if you can’t beat them, join them and we and we will come up with some better index funds.

53:35

Yeah.

Because I think I did say earlier that the index funds are stupid.

And I think there is an element of truth to that.

And we can come up with more intelligent indexes.

No.

No.

Well, there’s a lot of more intelligent indices around.

Yeah, I mean, and.

And you’re not the first guest to have made the comment that, you know, the an index fund by its nature is stupid.

53:57

And I think it was, Richard Oldfield said, hanging on the cocktails of a madman, buying high and selling low.

And there there’s clearly an element of that.

And of course, Warren Buffett has made passive investing the sort of Holy Grail for many people.

54:19

I was on.

I was on somebody else’s.

Podcast.

And I, they, they thought that I was talking rubbish, that an average person in the street could invest an element of their wealth quite successfully on their own in individual stocks.

54:37

I didn’t say, you know, all your listeners should go out tomorrow and buy, you know, a range of stocks as names they know and throw out all their index funds.

But I said, you know, if you’re interested in investing, it’s a really fun hobby and it can also make you some money.

54:55

And you know, I think it’s perfectly feasible for the private.

Investor to beat the index.

For the guy that whose podcast I was on, he did a round up of his year and he said that the biggest mistake of his year was having me on his podcast, which I thought was hilarious.

55:14

But I think there’s, there’s, you know, too few people have acknowledged that the the S&P 500 today is a quite risky animal.

Yeah, yeah.

And and and I just want to chip in one one thing here I’ve we have got to know a company called Stockopedia.

55:38

Yep.

And Stockopedia is an interesting company in my view in that if you’re a self-directed investor, you can get the data on 30,000 stocks around the world from their database.

And it’s rather like the old fashioned Excel cars.

55:54

You’re probably too young to remember those.

But anyway, it gives you the data that you and investor need, what their historic last 10 years of profit and loss accounts look like, how many shares there are an issue, what the issues they’ve done and so on.

And we are thinking of potentially teaming up with them to launch a range of ETFs that will be what I I would call research enhanced.

56:19

So you can call them active or passive, but they will have a using using some of their metrics.

No, it’s, that’s interesting.

I mean, in, in fact, there’s a lot of these systems around and even, and now you can even get this sort of data for free, which is which is quite remarkable.

56:38

It’s been a great pleasure talking to you.

I always end by asking people what book would you recommend to a young person thinking of becoming an investment analyst?

Well, my my book is Benjamin Grahams The Intelligent Investor, and when when I researched some of your other podcasts, I found that one or two other people had mentioned that book.

57:01

But it is a very good read.

No, I said brilliant.

It’s a brilliant book.

And the fact that it’s so old, I think old books, enduring books, they, they have a, they have a guaranteed quality to them because they’ve survived.

57:20

Tim Guinness, thank you so much.

And thank you.

Oh, I’m sure you can see why I asked Tim Guinness to be a guest in the show.

57:37

He’s really sharp, he still goes to the office every day, and he’s full of enthusiasm for stocks, markets and the future of his business.

I hadn’t really thought before about the outlook for a privately owned asset manager, and I was interested in Tim’s identification of such firms vulnerabilities to intermediaries stealing their business.

57:59

I walked into.

The tube after the.

Recording and we discussed the platforms like our groups Lands Them UK.

I think it would be a huge step for a firm of his size to develop such a platform, but he hopes Tech Advances may provide a solution.

This conversation made me think and I hope you too enjoyed it.

58:19

If you did, please do me a favour and tell just one friend and help us spread the word about the show.

Thanks for your support.