#13 – The Contrarian

Richard Oldfield is a true value investor. Author of the delightful commonsense investing book, Simple but not easy, in this interview he recites several wonderful anecdotes from his long experience as a value investor. We even get a song (and Steve recites one of Richard’s investment poems). Richard has an innate belief in the cyclical nature of markets and the madness of crowds. He is a classic contrarian investor and he came out with numerous gems about how to think in this way. Richard is a truly independent thinker. He doesn’t believe in index funds, likening them to hanging on to the coat-tails of a lunatic. He believes, as do I, that anyone with some common sense, experience and ability to manage their emotions can outperform the market.

SUMMARY

Richard Oldfield is a true English gentleman, with a self deprecating manner, a sharp wit and a deep understanding of investment.

In this interview, we discuss Richard’s brilliant yet under-appreciated book, Simple but not Easy. It’s chock full of anecdotes from his long experience as a value investor. Richard has an innate belief in the cyclical nature of markets and the madness of crowds. He is a classic contrarian investor and he came out with so many gems about how to think in this way.

He also frets about the mess central banks have got themselves into, but believes in the long term, equities will continue to deliver the 5-6% real that they always have. But he believes the time is now ripe for value and that the few true value investors left – those who have not given up the faith and veered off into quality investing – will have a field day.

GETTING INTO INVESTING

Richard's father was a stockbroker and did not encourage him to follow in his path, but he had a real interest and used to read the share prices in the newspaper from a young age. In the podcast he tells the story of his first investment, in Britannia Arrow. He made money as the stock was shunned through its association with the failed Slater Walker, even though the company was perfectly solid. Picture: Jim Walker. Source: The Guardian

On Index Funds

Richard has a rather jaundiced view of index funds. He describes participation as hanging on to the coat-tails of a lunatic, as the weighting is increased in what has already gone up. The practice of index revisions is to eliminate stocks which have gone down and increase participation in what has already gone up, which he describes as exactly the opposite of what you should be doing.

In his book, he describes the revisions to the FTSE 100 Index at the peak of the tech boom. Of course, the companies aded all had stratosperic valuations or were loss-making and the companies which were ejected from the index were old economy deep value stocks. The table shows the additions and deletions and the subsequent 3 month performance.

index changes

A Ditty

In Richard’s book, below, there is a wonderful ditty on the merits of Russia and China.
Was China finer?
It appeared,
We feared,
When the dollars were counted,
The odds had mounted
The convincing prospect
Of the growth we expect

Was Russia lusher?

It depended
We tended,
On how much imputing
To President Putin
Of a dubious motive
To increase his vote if,
As part of his prospectus,
He was seen by elector
To come out strong
When things done were wrong.
Too much faith in Khodorkhovsky. Could quite frankly be sort of costly.

simple

Simple, but not easy

Richard published the original book in 2007 and Harriman reissued an updated edition in 2021. He always enjoyed writing and having accumulated a lot of prejudices about investing over the years, wanted to give vent to his thoughts. He also thought that most of the investment books were not very approachable. The book is a common sense approach to investing and is aimed at those who want to maximise their long run returns.

Richard’s publisher (and mine), Harriman House, are offering the book at half price to podcast listeners this summer. Use the Code SBNE50.

ABOUT Richard Oldfield 

Richard founded Oldfield Partners LLP in 2004 and was chief executive until 2013, and chairman until 2022. He is now a partner, a non-executive director of the firm, and he contributes to the overall investment selection. Oldfield Partners is a value-style asset management firm with over $4bn in assets under management.

Richard was chief executive of Alta Advisers Ltd. from 1997 to March 2005. Before joining Alta in 1996 he was a director of Mercury Asset Management plc and head of the global team. He joined the S.G. Warburg & Co./Mercury group in 1977 on graduating from Oxford University. 

Richard was Chairman of the Oxford University Investment Committee and of Oxford University Endowment from the latter’s inception in 2007 until 2014 and is Chairman of Shepherd Neame, a director of Witan Investment Trust plc and a trustee of Royal Marsden Cancer Charity and Canterbury Cathedral Trust.

Richard holds a BA Hons in History from Oxford University. His book about investing, ‘Simple but not easy’, was published in 2007.

BOOK RECOMMENDATION

Richard recommended two books, one by Ben Graham and one by Peter Cundill. I chose Intelligent Investor as I think it’s the more approachable book. There’s Always Something to Do by Cundill is available on Kindle.

The Intelligent Investor by Benjamin Graham - Behind the Balance Sheet
Peter

HOW STEVE KNOWS THE GUESTS

I didn’t know Richard, but bumped into him at the London Value Investor Conference. I explained how much I enjoyed his book and asked him on the podcast. He was keen to promote the second edition and to my delight, he agreed. I really enjoyed talking to him. This is one reason why I started the podcast  – I get to meet people I would not otherwise, and I get to learn, which is my passion.  

CHAPTERS

00:02 – Introduction and Investment Disclaimer
09:46 – The Coat Tails of Aunty
21:43 – The Temptation to Run
32:39 – The Problem with Growth
37:40 – Finding Opportunities in Difficulty
45:40 – Lessons from Mistakes
53:16 – The Philosophy of a Brave Investor

 

TRANSCRIPT  

STEPHEN CLAPHAM: Richard Oldfield is a true English gentleman with a self deprecating manner, a sharp wit and a deep understanding of investment. He held senior positions in Mercury Asset Management. Then one of the top investment firms in the UK before running altar advisors for one of Europe’s richest families and then setting up the eponymous Oldfield partners, a £4 billion value investing firm.

STEPHEN CLAPHAM: In this interview, we discussed Richard’s brilliant, yet underappreciated book, simple but not easy. It’s chock full of anecdotes from his long experience as a value investor. Richard has an innate belief in the cyclical nature of markets and in the madness of crowds. He’s a classic contrarian investor and he came out with so many gems about how to think in this way.

STEPHEN CLAPHAM: The wonderful thing about Richard’s approach is that he is truly an independent thinker. He doesn’t believe in index funds. He likens them to hanging onto the coattails of a lunatic. He believes as do I that anyone with some common sense, a bit of experience and an ability to manage their emotions can outperform the market, enjoy his advice.

STEPHEN CLAPHAM: And if you enjoy the episode and would like to buy his book, our friends at Harriman has have a special offer, go to their website and buy the book with a code S B N E 50 Simple, but not easy for 50% off. And this is the first episode of this podcast in which I’ve actually recited some poetry and in which our guest sings, Richard. Best. Stick to the day job mate. Thank you for listening. I hope you enjoy this episode.

STEPHEN CLAPHAM: So Richard, welcome to the podcast. It’s great to have you. Did you always want to be an investor?

RICHARD OLDFIELD: Well, Steve, it was great to be here. Thank you very much for asking me. The answer is sort of more or less. Yes. If by way, you mean back to the age of sort of 14, 15 when very sort of very uncool. I used to look at the share prices in the Daily Telegraph and I got interested in share prices and markets at a very early age.

RICHARD OLDFIELD: And I first invested in a company called, Britannia Arrow. I think at the age of 17, 1800 quid, something like that, probably less than 100 quid. It was a, it was a rump of, Slater Walker. Slater Walker had gone bust in the secondary banking crisis in 73 or so.

RICHARD OLDFIELD: So I was 18 and Britannia was, had been Slater Walker insurance and it was perfectly respectable and viable. But because it had been associated with Slater Walker, its share price was almost zero. I think it was six P in fact. And six. No, I think we’ve had decimal. Ok. I think we were, I think they were called Six New P for a while.

RICHARD OLDFIELD: And I, and I didn’t of course know what I was doing at all, but I think I was always drawn even from that age to low share prices, which also meant probably low valuation. It’s not that I knew about valuations.

RICHARD OLDFIELD: And I did kind of reason that I could lose six P, but I might make 18 P and the, and the risk was, was favorable. And also I knew this was a respectable company which had simply been tainted by its association with Slater Walker. So the answer is yes, from quite an early age I was, I was very much into investment.

STEPHEN CLAPHAM: And was this something that your parents encouraged?

RICHARD OLDFIELD: Or my father was a Scott Breaker? But he didn’t encourage it at all. I wouldn’t say he actively discouraged, but he wasn’t really interested in, in whether I went into the city or not. He didn’t care about that. And no, nobody else particularly encouraged me. So it was just in the blood. Oh, interesting.

STEPHEN CLAPHAM: And Britain was it successful?

RICHARD OLDFIELD: It was successful.

STEPHEN CLAPHAM: And that’s, that can be good or bad because if you lose money when you start, then you get taught a lesson.

RICHARD OLDFIELD: So I might, I might have been a doctor or a train driver.

STEPHEN CLAPHAM: Well, I glad you glad you didn’t. So it took a little while before you started losing some money. So listen, you wrote this book. Simple.

RICHARD OLDFIELD: But I think the world is very fortunate. I wasn’t a train driver or a, or a doctor or we were fortunate that you were an investor.

STEPHEN CLAPHAM: But this book Simple but not easy. You wrote in 2007 and it’s kind of a common sense approach to investing for those looking to maximize their long term returns. What made you want to write a book.

RICHARD OLDFIELD: But I’d always like writing and I had accumulated all sorts of prejudices about, about investment over the years and it was a, it was a chance to let off steam and, and give vent to all the thoughts that I’d had about investing. And I also felt that the investment books that I’ve read, with the exception of a few are not a very good read.

RICHARD OLDFIELD: And I’ve felt that investment ought to be as the title is. It ought to be simple. The rudiments of investment are simple. The rudiments of investing in shares are quite straightforward.

RICHARD OLDFIELD: Of course, there are very complex instruments and, and that can’t be said of those but of, of investment in companies, the rudiments are straightforward and they’re dressed up to be extremely complicated in the way that it is true of all professionals because professionals import a whole lot of jargon, partly as a kind of, you know, how clever are we sort of thing and partly to put off incomers.

RICHARD OLDFIELD: And I felt that investment was for everyone really that everybody can take an interest in investment.

RICHARD OLDFIELD: And particularly because, and then the second part of the sentence of the the title is not easy, particularly because of this extraordinary facet about investment, which is not true of almost any other profession I can think of which is that more than half the investment managers in the world will turn out not to have done a good job, will have underperformed the market over the long term because the market, if it’s a, if it’s a sophisticated market is effectively made up of professional investors.

RICHARD OLDFIELD: And so by by definition, the average manager must be roughly in line with the index. But a bit worse than that because of fees and transaction costs. And that is so different from any other profession, accountants. You expect to add up all the figures, postmen, you expect to deliver the letter to the right place, 99.9% of the time.

RICHARD OLDFIELD: It was actually when I said, made this remark to somebody who was a lawyer, he, he pointed out that lawyers lose half their cases, but they, they, they, I don’t know whether they do or not.

RICHARD OLDFIELD: Anyway, so it’s an unusual profession and, and so it is both simple in the rudiments of it, but it is also much more difficult than the layperson thinks it is to outperform because of the nature of the market. And I think the layperson with common sense and so on, has a perfectly decent chance of doing it, him or herself.

STEPHEN CLAPHAM: And that was why I wrote the book and you were quite skeptical about index funds weren’t very skeptical about. You still are skeptical. So tell us the examples that you used in the book because it was quite fascinating.

RICHARD OLDFIELD: The original book in 2007 you talked about in at the peak of the tech boom in 2000 in March 2000. The index committee of the, of the 100 chucked out of the index. A whole lot of old fashioned companies. I remember Whitbread was one of them.

RICHARD OLDFIELD: I forget what the others were, but those sorts of companies and they put into the index, a whole lot of, new fangled companies that had probably not existed five years before. And certainly I have hardly heard of some of them.

RICHARD OLDFIELD: So I think five companies in five companies out that was the peak of the tech boom. They put, they made that change because index committees on the whole work on market capitalization. So if your share price goes up, you would start at more of a chance of getting into the index. If your share price goes down, you get chucked out of the index, which is in a way the opposite of what common sense should lead one to do.

RICHARD OLDFIELD: And sure enough in March 2000, the tech bubble burst six months later, the index committee had to reverse their move because in that interim time, the price of Whitbread had gone up by 25 or 30%. I think the average price increase of those five or six companies was 25% the six companies which have been ejected and the half dozen which have been included in the index had gone down by an average of, I think more than 25%.

RICHARD OLDFIELD: And so, and so they had to reverse it because the market capitalization rationale meant that they had to include the company which they’d ejected only six months earlier and track out the company. So if you were, if you were following the index fund, if you were invested in an index fund, that’s what you did.

RICHARD OLDFIELD: And so my view of index funds is that you are really treading on the coat tails of a lunatic. If you, if you, if you pursue an index fund strategy, indexes were never invented for the purpose of investment. They were invented for the purpose of measurement. They were a yardstick for performance measurement and, and have a very valued role as that, but they were not invented for people to invest in.

RICHARD OLDFIELD: I think, if you invest in an index fund, you have to realize that you are following the coat tails of a hanging on to the coattails of aunty. Now, it may be and this is the sort of back to the point I was making a moment ago. There’s this sort of chilling fact that by hanging on to the coattails of a lunatic, you may nonetheless do better than the average manager.

RICHARD OLDFIELD: And so there is a sort of there’s a sanity in lunacy.

RICHARD OLDFIELD: But I do think that it is possible for a group of people or a person or a family if they apply common sense to choose managers, the majority of whom, will outperform. The majority of the time, I wouldn’t put it any stronger than that.

RICHARD OLDFIELD: I’ve been on lots of investment committees and, any investment committee which thought that he could always choose managers who would consistently outperform should go into index funds because they’re likely to make terrible mistakes.

RICHARD OLDFIELD: If they take that view, then when a manager is under perform for a few years, they will want to get rid of the manager. It may be completely the wrong time to do so. And that was absolutely the case in, in 2000 when the managers you wanted then were ones who just performed very badly for several years.

STEPHEN CLAPHAM: I was one of them and it’s, of course, the same things is exactly true today.

RICHARD OLDFIELD: I think the same thing is true today. And of course, we’ve had, we’ve had several moments at which one could have said that. And I did think in February 2016, which was, which was very good, did turn out to be a very good year, but it didn’t last into 2018 2019 2020. I did think in February 2016, we got a turning point in this style question of, of value versus growth, didn’t, it didn’t turn out to be the case now.

RICHARD OLDFIELD: It’s, it’s, it’s lined up pretty, pretty strongly now because one of the things that value, one of the things which hurts growth companies, companies which have high growth rates with earnings and cash flow, not terrifically strong in the immediate term. But looking at a number of years projected to be very strong.

RICHARD OLDFIELD: One of the things which hurts those companies is if the discount rate, which you apply to future earnings and future cash flow rises. And it looks, of course, we, we never know that it looks as if as from towards the end of last year, we’ve got a significant turn in interest rates which may last for a long period.

RICHARD OLDFIELD: Once interest rates start to increase, they usually go on increasing for some years. And we have this extraordinary position in the world in which interest rates are so far below the rate of inflation that it’s difficult to see the central bank stopping increasing interest rates in the near future.

STEPHEN CLAPHAM: Well, we’ll see, won’t we? Because I mean, there’s quite a strong body of opinion in the US that the FED will run at the first sight of recession. And you know, they, because what choice do they do? They have, do they in induce a recession to conquer inflation?

RICHARD OLDFIELD: It’s a real dilemma and it’s real.

STEPHEN CLAPHAM: And you know, I mean, I wouldn’t say I’ve got any sympathy with the FED, but the, the problem they’ve got is they’ve got so much debt and we all, I mean, everywhere. So you kind of think the strategy has to be financial repression, inflate the debt away and hope that you don’t do too much damage to the economy in the meantime.

RICHARD OLDFIELD: Yeah. No, I, I agree with that. I think they’ve, they’ve somehow got themselves into just a hopeless muddle where you have got this. They’ve had 10, 15 years in which they couldn’t make inflation budge.

RICHARD OLDFIELD: And it was fine therefore to have interest rates close to zero because inflation was close to zero. Now, inflation is very, very far from zero and still they have interest rates which are not far from zero. And that’s an absurd position.

RICHARD OLDFIELD: So I think they are likely to go on increasing rates but they are in, as you, as you say, they’re in a, in a terrible mess. And I think it’s really interesting that the, the bank for international settlements, which is usually a pretty hawkish on inflation and b perhaps the most sort of sensible, the most even headed of all the central banks and has a very good record.

RICHARD OLDFIELD: Well, they said the other day, something like it’s necessary to carry on increasing interest rates to do something about inflation. On the other hand, banks will be wary of increasing interest rates which cause recession. So even the B I S is in a muddle, it can’t really figure out what path to take.

STEPHEN CLAPHAM: Well, of course, the, the issue is that you can put up rates. All, you, all you, like, you’re not going to get more oil out of the ground. And, I mean, that, that’s the, that’s the basic problem. So it’s actually, I think very different in the seventies. I mean, did you spend a lot of time worrying about Macron when you were, when you were running money?

RICHARD OLDFIELD: I mean, or was it one of the, you, I think you can’t, you can’t ignore Macro and we, we, I mean, I, and, and the team that I worked with at, at oilfield partners, we’re very much not macro, we’re very much concentrating on companies and trying to choose companies whose businesses are essentially sound at low valuations.

RICHARD OLDFIELD: And that doesn’t exclude cyclical companies, but the cyclical companies have to have balance sheets which are strong enough to last through hard times because we’re, we’re not good at forecasting when those hard times will be. And, and I, I think very few people are good at forecasting.

RICHARD OLDFIELD: I mean, I love the whole sort of row of, wildly, wildly wrong forecasts that, there have been through history H M Warner, for example, saying that he didn’t think that, talkies would ever catch on. Why should people want to see actors talking lots of forecasts, which turned out to be crap.

STEPHEN CLAPHAM: It’s not just economists that are bad at forecasting. I, I agree. Now in the book which I really enjoyed because it was, it was just a very simple book to read and, and full of, I mean, just chock full of wisdom. You use this analogy of being unable to find the first class carriage on a train and turning around too early. And you use that as an ally for I’m mistaken investing. Can you, can you tell us about that?

RICHARD OLDFIELD: Sure. Yeah. Well, the so often in investment, you are patient, patient, patient and, and it, and it’s not coming right. You wait and you wait and you wait and finally you think the market must be right. I’ve got this wrong. I give up and of course, that I mean, that’s happened to me many times but I try hard to resist the temptation to, to run. And I try hard to be patient.

RICHARD OLDFIELD: But one of my sort of mentors in the investment world is a man called Peter Cundall. And his mantra was patience, patience, patience. And I always, I like that that repetition because patience has more than one, meaning it is not only it’s it’s suffering in, in the Bible as well as waiting. There’s also a hospital patient which is sort of sometimes sometimes relevant.

RICHARD OLDFIELD: So patients, patients, patients and the, the, the analogy I made was of true story, which did make me think of investment. I was quite early in my career at war. So I had to go to Cambridge to talk to some undergraduates about investment. And I, we were bought first class tickets by war boats. And I walked right to the end of the, of the train at Liverpool Street, right to the, almost, almost to the front.

RICHARD OLDFIELD: And then I gave up because I couldn’t find a first class carriage. And I thought I must have passed it time and walked back. But of course, in fact, the first class carriage was right at the front behind the driver’s gap.

RICHARD OLDFIELD: And that happens just so often in investment that you give up at the moment of maximum fear. And it’s not a coincidence that this a moment of maximum fear because the moment when the share price is weakest is when nearly everybody has given up on it. And that moment is turns out to be the turning point.

STEPHEN CLAPHAM: So how, how do you manage for that?

RICHARD OLDFIELD: I, I think you have to be emotionally kind of geared to manage it and, and they, and they, and I think that value investors are born, not made people who have an inclination to invest in companies with low valuations who are drawn to companies whose share prices have gone down.

RICHARD OLDFIELD: I take the view that the share price which has fallen is more interesting. Makes the share more interesting than it was before it was fallen. That sort of attitude has to be innate. I think you can, you can read and learn and it’s very, it’s very important to read and learn.

RICHARD OLDFIELD: But it’s, it’s, it’s interesting how many investors value investors have said that they read the intelligent investor by Ben Graham. And the light bulb came on. They had a kind of flash of, in, of inspiration. They had an epiphany and they realized this is what they’ve been waiting for all their life, so to speak.

RICHARD OLDFIELD: Because it was always in them. And they needed Ben Graham or Warren Buffett later to, to express what they were, what they knew they were trying to do, but they hadn’t been able to articulate themselves. So I think that that I think that attitude is innate and therefore it’s very difficult.

RICHARD OLDFIELD: I think recruiting somebody who’s not used to thinking in that way and thinking that you can turn them to think in a value way is a mistake you, you, you need on the whole to have people who are similarly value investors.

RICHARD OLDFIELD: Because otherwise it’s, it’s when things go wrong that you get the tests always and when things go wrong, those who don’t really have that kind of attitude in their blood will be will be panicking. They’ll be turning back just before they reach the first class carriage.

STEPHEN CLAPHAM: I like the comment you made in the book that you prefer to invest in a stock where investors are unhappy.

RICHARD OLDFIELD: And I thought that was a very good, that is, that’s very important because if everybody is happy, then it’s reflected in the stock price, the valuation is higher.

RICHARD OLDFIELD: I saw this in the, in, in, in a private equity context, I saw something about a private equity group the other day and I think it’s probably fairly typical in their most recent funds. The growth rate of the companies that they hold was around 20% growth rate in revenues in revenues in companies which they owned in their earlier funds and still own today.

RICHARD OLDFIELD: The growth rate is sub 5%. And that I think that’s an illustration you could interpret it in various ways. But I think it’s an illustration of the fact that people tend to be overoptimistic. They tend to be influenced by the immediate past.

RICHARD OLDFIELD: They’re influenced by the fact that rent a kill, for example, which was a great glory growth, glory stock in what I suppose 20 years ago now grew by 20% a year. It grew by 20% a year and it’s, it’s chief executive Clive Thompson became known as Mr 20% until one day. It didn’t grow by 20% because almost no companies grow year after year after year by 20% Jack, we had the same problem.

RICHARD OLDFIELD: Well, he retired, in fact, just in, in front of the problem. But, but at General Electric, there was growth of the order of 20% year after year until Jack Welsh retired and, and then it hit the skids and, and, and didn’t grow at all for some years, 20% a year, year after year after year just does not happen. And share prices which reflect too much good news, are tend to be overvalued.

RICHARD OLDFIELD: So, what, you know, what I always said is that, I think the, I think the value has an advantage in the, in the investment casino. And if you go to the table, which is marked value, the banker is erratically inconsistently, but he’s pushing chips in your direction, not a huge number, but he’s pushing them in your direction if you, because there’s bad expectations embedded in, in the, in the companies of that table.

RICHARD OLDFIELD: If you go to the table marked growth, you’re going to a table in which the banker is taking a disproportionate amount of the chips off the table because there’s so much optimism built into the companies that you find at that table.

STEPHEN CLAPHAM: And of course, you, you espouse this philosophy in, in the original book which was published in 2007 and, and then value went on to do very badly and you’ve updated the book. And why did you, why did you want to return to that? Why update the book rather than write a whole new book?

RICHARD OLDFIELD: I couldn’t face writing a whole new book. Oh, really? Well, not, not, not kind of regurgitating the same things that I had written about before I write a new book about something quite different but not, not. And Harman House said that they wanted to, publish it. It, the first book had sold out.

RICHARD OLDFIELD: And so we, we agreed that I’d write a sort of 50 60 page afterward which dealt with the things which had happened since 2007 when the first book was published. But a but alongside a reprint of, of the first book, so it covers the things which seem to be sort of on track still and the things which are, are not, which have not been on track. And there isn’t too much that I regret having written in 2007.

RICHARD OLDFIELD: I mean, the central sort of messages of the book, I would hold to today and I mean, and perhaps that’s sort of pertinent today because one of the most central themes of the book is have faith in equities and we’ve had a 20% fall in the S and P. We’ve had a more than that fall in, in in NASDAQ and, and in some other indices this year. So this, you know, this is a pertinent question again. Is it all over?

RICHARD OLDFIELD: And a lot of people are saying that the 40 year move since I began work in 1977 40 years since I began investing in 1982 is over and it may be, but I just, I just wouldn’t bet on that. I would bet on equities over the long term to do what they have done in the past, which is to provide a sort of five or 6% real return. But in exchange for that very high return, you get some very big bumps and this is a very big bump.

STEPHEN CLAPHAM: I don’t say it doesn’t feel that big to me. I mean, I know there’s a lot of, I know there’s a lot of growth investors nursing a lot of pain with 70 80% falls. But, I mean, it pains from, from the falls have been from ridiculous levels, you know, $100 billion floats for no revenue companies.

STEPHEN CLAPHAM: I mean, you know, oh, big deal. It’s fallen by 80%. It’s still $20 billion still hasn’t coined a dollar of revenue. I don’t really get what the problem. You know, I don’t get why people were surprised.

RICHARD OLDFIELD: Well, I, I agree, I agree with that. I think, you know, a lot of things went to stratospheric valuations which were simply not justified and some of them were in, particularly in the spec field where, some of those spec companies have fallen by 90 or 95%. Yeah. And the UK is not exactly in front of the front of the, top of the league at the moment in world reputation and performance and so on.

RICHARD OLDFIELD: But I was just sort of pleased to note that the one spec which came in London because to compete for specs, the ones back in London is, is actually up and it’s in an old fashioned business. Whereas, a lot of the, the, the ones in the States have been in businesses with, as you say, no revenues in the foreseeable future or possibly ever.

STEPHEN CLAPHAM: I mean, some of them, I suspect in the second edition you are suggesting that the 2020 will be the decayed for active managers. Precisely because the 20 tens were so cruel.

STEPHEN CLAPHAM: Why did you frame it like this? I mean, do you think fashions and stock markets last like a 10 year cycle? I mean, are you one of these, you know, Howard Marks goes on about mastering the cycle? Is that, do you follow that?

RICHARD OLDFIELD: Well, I don’t, I wouldn’t, I wouldn’t put it in any particular. I don’t know how many years it is. But yes, I absolutely do believe there are phases in markets. There are, there are cycles in markets and they have something to do with cycles in economies.

RICHARD OLDFIELD: They’re more or less unstoppable because of human nature, human nature jumps on bandwagons. And then when the Minsky moment comes, the Minsky view was that the more stability you get over a period of years, the greater the risk of instability because people get too comfortable and that drives markets to very high valuations from which then they fall.

RICHARD OLDFIELD: So, so I do absolutely believe that markets are highly cyclical and the reason I think that active managers in general are well placed now is that index funds, the move into index funds, which has been absolutely enormous, has meant that the the largest companies, the fans especially have come to be a quite disproportionate part of the major indices.

RICHARD OLDFIELD: So I think the fangs constitute something like close to 30% of, of the S and P.

RICHARD OLDFIELD: Well, that’s not a natural position. It’s higher than it’s ever been, almost ever been in the past and few actively managed portfolios would have anything like 30%. In fact, there may be some, but there’d be very, very few.

RICHARD OLDFIELD: It would only be index funds who do. So, there’s been a kind of compounding effect that as index funds have grown more and more money has gone into those few companies and that equally works in reverse that if you get a period in which for one reason or another acting managers do.

RICHARD OLDFIELD: Well, those who have invested in index funds, I think will suddenly have some regrets and they will say, well, ok, we could have, we could have a third of the fund in index because it’s cheap, but we really ought to be finding some of these managers who are out performing over the last year or two and then you get the compounding effect in the other direction.

RICHARD OLDFIELD: The unwinding effect of that concentration here fans.

RICHARD OLDFIELD: So I think it could be a very good decade for for active managers and, and especially for value managers, because there’s been so much movement towards growth managers over the last 10 years, there are very few value managers really true value managers left. And value is value is interpreted differently.

RICHARD OLDFIELD: There’s the old Ben Graham view of value, which was a sort of purer or deeper value than the more modern quality value type of of investment which I think Warren Buffett is responsible for, for, for, for muddying really because people regard Buffett who is a tremendous superhero and justifies canonization, but they regard him as a value investor and therefore they regard whatever he does as being a value investment.

RICHARD OLDFIELD: But investment in Coca Cola, for example, is not a value investment.

RICHARD OLDFIELD: And so he I think has muddied the interpretation of value, which has meant during this really tough period for deep value, it’s been easy for some investors to kind of fall off the edge and say, well, we we we’re still value investors, but we’re buying rather different sorts of stocks with high quality.

RICHARD OLDFIELD: Actually, they have left the field of deep value investment. That means it’s been it’s it’s an under under abused field. And if, if the trend turns, then there’ll be a massive move back into that area of the market which at the moment is ignored. And I, I mean, that’s why, you know, our, my my colleagues run are on P S of 10 and, and less with good dividend yield and these are essentially sound businesses.

RICHARD OLDFIELD: They’re not looking at earnings years out. I think this is a moment when one wants to find investors who are basing their valuations, not on earnings three or four years in the future when there’s too much, which is uncertain, but on cash flow and earnings which are pretty current. And it happens that because of what has happened to deep value, that’s an area which is just stuff full of really good opportunities.

RICHARD OLDFIELD: So I’m, although I think the world is in an awful mess and, and I think that this gap between interest rates and inflation is a real problem. And inflation itself is something which is very difficult to grapple with. I’m, I’m old enough to remember the, the the seventies and to have been around during that time when you know, wages were, were changing so frequently, prices were changing every day.

RICHARD OLDFIELD: And you need a different sort of mindset to cope with that, that problem, both as a company and as an investor. So I think the world is very difficult, but I’m very optimistic that there are a lot of companies which will provide good returns over the next five years or so.

STEPHEN CLAPHAM: Yeah, I, I, I don’t disagree with you. I mean, I think there, you know, lots of people have viewed the fangs as being bulletproof as, you know, having quasi monopolies. And I think there’s an element of truth, you know, with all these things, there’s always, there has to be an element of truth behind it for people to, to believe in it.

STEPHEN CLAPHAM: And I think there’s massive difference between a Facebook and an alphabet. They might both be exposed to a downturn in advertising over the next two years. But I know that in 10 years time, I’m still going to be using Google for search, I can’t conceive of that monopoly disappearing because they just got too big an advantage.

STEPHEN CLAPHAM: Whereas Facebook, well, I don’t know when Facebook started, it came to the market in 2011. So it’s probably five years old. Then 20 years ago, there wasn’t a Facebook and in 20 years time there may not be one again. I quite, I quite agree.

RICHARD OLDFIELD: I mean, I think there are two things. One is one is that even the very best companies get an excess of enthusiasm so that they go to valuations, which the slightest bit of not so good news, leads to a very large fall in the share price and it can still be in fact good news, but it’s not good enough the news. So you suddenly have a quarter in which earnings growth was sort of 5% or 10% or rather than the 20%.

RICHARD OLDFIELD: That the market has come to expect. It’s a problem. That’s one thing that happens. And the other thing that, that has happened is exactly as you’ve said, there are some companies which have, as it appears pretty much monopolies, but there are so many companies which are valued as though they are going to be the dominant, company in their, in their field in 5, 10 years time and they can’t all be the dominant company.

STEPHEN CLAPHAM: No, of course, that’s the, well, that’s the same problem we had in the dot com boom. Now, I wanted to talk to you about stepping out of the office because you wrote some fantastic stuff about going out and visiting companies and visiting Overseas countries. So you suggested that there were two dangers of stepping out of the office.

STEPHEN CLAPHAM: One is that CEO S can be charming and persuasive. And you said that travel narrows the mind. You cited a visit to Russia before its collapse in 1998 and when it reneged on its sovereign debt, how should investors or professional investors? How should they maintain their equilibrium when they do? Because you do believe that it is worthwhile.

RICHARD OLDFIELD: I do, I do, I do.

RICHARD OLDFIELD: But I think you, I think they invest, they’ve got to keep in perspective the, the extra bit of information that they’ve got from the visit. I mean, if you go on a holiday to, well, if I go on holiday to Jordan I come back thinking, I really know a lot about Jordan. But of course, I know not quite sweet fa but I know very, very little about Jordan compared with those who live there or have been going there for years and years.

RICHARD OLDFIELD: And it’s very tempting as an investor to think when you visited the CEO on home ground and walked around a factory that suddenly, you know, all about the company. And it’s very tempting when you visit a country for the first time to think, suddenly you understand the country.

RICHARD OLDFIELD: So that’s why I use those, those sort of exaggerated terms. And I, I mean, I talk about visiting Walmart, which is a wonderful company. I used to go when I was at Mercury. I used, I went, I think three times to Walmart in probably three successive years, perhaps based over four years. And each time I went, I came back thinking it was worth a couple more on the price earnings multiple than before.

RICHARD OLDFIELD: I’d gone because the chief executive was so good at spinning the story. And in those days, one could get a one on one with with the CFO and sitting in his office, which was a sort of thread bear affair. And he’d point to his batter for in the car park and you thought this is, this is great. This is the cost cutting ethos of Sam Walton.

RICHARD OLDFIELD: But it was probably more just that people in those sort of positions are very good at spinning the company’s story. So I, I’m wary of, but as you say, I, we don’t, I don’t run away from chief executives. They add a bit of color to the story. I mean, I, in the, in the update to the book, I talk about a recent big mistake, which was with Tesco where, when, Terry Leahy retired, the company was at the top of its game.

RICHARD OLDFIELD: And actually I remember, I remember, but I didn’t remember soon enough what Simon Marks of Marks And Spencer said, which is he worried about margins being too high because he said if margins are very high, either the quality is suffering or the or the service is suffering.

RICHARD OLDFIELD: And this happened at Tesco, Terry Lee, he was there for a good long time so often when you have a chief executive, very successful who’s been there for a long time towards the end, they are slightly sort of struggling to hold on to the statistical record. And he passed on a legacy to his successor, Phil Clark, which was extremely difficult.

RICHARD OLDFIELD: And Phil Clark when things began to go wrong, he said, roughly speaking, don’t worry, we can, we can sustain 5.2% trading margins. And in fact, all our sort of internal work cast doubt on that, but we were persuaded by the chief executive. We thought he’d been given a difficult job by his predecessor. And we we wanted to believe, we wanted to believe him so often in investment, investment is like hoaxes.

RICHARD OLDFIELD: It’s so often a case of people wanting to believe of credulity, which is, again, is something that’s, that’s always fascinated me. I love hoaxes. I’ve always been fascinated by hoaxes because they’re all to do with the psychology of, of markets and the psychology of, of crowds. And, you know, because he’s, he’s done something I feel I should do the same.

RICHARD OLDFIELD: Anyway, Tesco was another case of being too, too close to the chief executive. We not that we knew him well, we met him a few times but we wanted to believe the chief executive and I think the lesson is, you don’t want to just accept what chief executives say, you want to watch what they do and come to your own objective conclusions about what they say.

STEPHEN CLAPHAM: Tesco was a funny example because Lee, he was up to all sorts of accounting shenanigans before he stepped off the bus. And Phil Clark was a very genuine, very honest guy.

STEPHEN CLAPHAM: I mean, I, I remember meeting him just coincidentally at a social event and we were just talking about where we lived and he knew my local branch of Tesco and I thought, I mean, I don’t know how many stores they’ve got, but 2000, I mean, it was ok, it was a London store but he knew intimately the, the, the nature of that business and I was, like, incredibly impressed by that. Of course, you shouldn’t be impressed.

RICHARD OLDFIELD: Right. Yeah, I think that’s right. I think you, I mean, of course, you can’t help being impressed by people or not impressed by people, but you have to be very cautious about how much weight you give to that in a decision about investment.

RICHARD OLDFIELD: And one of the really, one of the, one of the real alarm signals which we didn’t pay enough attention to and that we didn’t know about until, until after, Dave, his name, Dave Lewis came in. Sorry, was the, there was a revelation during the sort of unraveling of the accounting scandal that in one year, the product range had increased by 31% the number of SKU S had increased by 31%.

RICHARD OLDFIELD: And the reason for that was that there was promotional payments made by the suppliers which inflated the revenues. I mean, you might have in one area, a whole lot of promotional payments because it was sort of genuine new marketing policy. But to have that across the company to the extent of 31% shows a pretty dodgy policy. Absolutely.

STEPHEN CLAPHAM: And, and that, I mean, that wasn’t the only dodgy policy. They were, they were doing all sorts, all sorts of things. I loved the, in the book you talk about, we were talking about Russia and your visit to Russia. And you’d you, you did a little poem which was a minute of a discussion about China, Russia and Khodorkovsky who was the Yukos man and I was China finer.

STEPHEN CLAPHAM: It appeared, we feared when the dollars were counted, the odds had mounted that the markets discounted. The convincing aspect of the growth we expect was Russia lusher. It depended. We tended on how much imputing to President Putin of a dubious motive to increase his vote.

STEPHEN CLAPHAM: If, as part of his prospectus, he was seen by electors to come out strong when things done were wrong. Too much faith in Khodorkovsky could quite frankly be sort of costly. Now, I thought this was brilliant. But what made, I mean, how long did it take you to write a minute like that?

RICHARD OLDFIELD: I’d, I’d had lunch with, with, with a friend. We talked about Russia. I said it straight after the lunch and it’s certainly, you know, it’s not a really very good poem.

STEPHEN CLAPHAM: I thought it was very good fun.

STEPHEN CLAPHAM: So, was that, was that, was that a bottle of claret over lunch?

RICHARD OLDFIELD: And, and I, I think it was a dry lunch. It was a dry lunch.

STEPHEN CLAPHAM: But have you always tried to bring that sort of sense of humor to the, to the table when you’ve been working with the team? And how, how does one do that because it’s quite difficult in an investing environment to inject humor? Sometimes?

RICHARD OLDFIELD: I, I don’t know, I think you, I think, I think you can inject humor into every part of life.

RICHARD OLDFIELD: And, yeah, if you can’t find humor then it’s a, it’s a duller sort of life.

STEPHEN CLAPHAM: So, so, do you, I mean, is this the sort of thing that you would knock up quite regularly?

RICHARD OLDFIELD: No, I, I, I can’t remember whether I had a, I had a colleague and I quote him, great friend and colleague called Norman Backup, who used to write songs about investment. He was a brilliant songwriter, two tunes which already existed and one of his songs when I was first at in the late 19 seventies, I worked in New York from 79 to 81.

RICHARD OLDFIELD: And my job was to try to persuade pension funds to invest internationally. And he wrote this wonderful song, a part of which I can remember which I will now sing to you. It was, it was to the tune of thoroughly modern Millie.

RICHARD OLDFIELD: And I don’t think I really know the tune of thoroughly modern Millie. But he went roughly like this international diversification lowers your volatility increases your internal rate of return, improves your liquidity, invest just 10% outside the US and your returns will sure impress with their relative success and so on.

RICHARD OLDFIELD: Anyway, so yeah, a bit of bit of, bit of knowledge is a good thing.

STEPHEN CLAPHAM: So, I need to go on a poetry course, obviously. So look you have been a global investor and that’s what I did as well. And one criticism often leveled people in that role is you don’t have enough time and expertise to really get to know all the stocks and economies. I mean, we both of us, I’m sure are far more knowledgeable about the UK and about South Korea or Brazil, which is often where you end up investing.

STEPHEN CLAPHAM: You explain in the original book, an anecdote about the 1987 crash about why distance is helpful. Can you just share that with the listeners?

RICHARD OLDFIELD: Sure. I was when the crash happened, I was the head of the US Equity team at Mercury and I was on holiday, I was in Spain when I got a call from my uncle. We’ve got a, we’ve got a, a House in ca which has lots of trees around it and most of them had fallen down and, and also part of the roof had fallen in.

RICHARD OLDFIELD: And so we cut short, our holiday came back, but I was still meant to have another week of holiday. So on the Monday, after the after the storm which had taken place on Friday, I was walking amongst this terrible chaos of fallen trees.

RICHARD OLDFIELD: When I got a call, it can’t have been quite like that because mobiles didn’t really exist then. So I must have gone in and got the call from somebody who said the dow Jones is down 500 points. And I, I remember thinking instantly, well, that really doesn’t matter very much. These fallen trees are the sort of thing that matter.

RICHARD OLDFIELD: And, and also regarding it as a kind of non event and an opportunity and I did, I continue to think that for 24 hours, but after a day or so I thought I’d better go back to work because I was the head of the US Equity team and I, I felt I should be there. And as soon as I went back, having thought prices are 25% lower than they were, this is very attractive. I got caught up in the emotion that everybody else had.

RICHARD OLDFIELD: And in fact, I was part of, I wasn’t head of it. The head of the strategy committee at that time, went to 40% cash in our global equity portfolios after the crash. And there was, there was almost no dissension from that. And of course, it was calamitously wrong. That was a real lesson. It was one of the big, big lessons of my career.

RICHARD OLDFIELD: And of course, you can play the trouble with these lessons in investment is that next time it’s the reverse that you should have done. So next time, maybe one, we should be getting 40% cash. But anyway, that lesson sort of plays very strong with me and has done for for 40 30 33 35 years because distance can be an advantage.

RICHARD OLDFIELD: Sorry. Yes, distance is an advantage. And also second thing is that taking these big wholesale decisions about asset allocation has an a great probability of being wrong. Because by the time you take them, you’ve got virtual unanimity, you’ve got a consensus.

RICHARD OLDFIELD: And if you’ve got a consensus, then people are already there in, in, in market terms. I’m a great deputy of a thing called the Investors Intelligent Survey Of Advisory Sentiment in the States which measures the bullishness or the bearishness of newsletters.

RICHARD OLDFIELD: And there’s a tendency for them to be bullish because they’re all in the business and it’s an inverse indicator. So when the overwhelming majority is bullish, it’s a by signal. When the overwhelming majority is bearish, it’s a cell signal. And that’s the sort of peculiarity and the attraction of the sort of fascination of markets.

STEPHEN CLAPHAM: I was talking to somebody recording a podcast last week funnily enough. And they were saying that they have colleagues in another firm where there are several P MS and they debate the ideas, but at the end of the day, they don’t form a committee and, and vote and you present your idea and you get a lot of pushback and everybody hates it.

STEPHEN CLAPHAM: They think it’s a rotten idea, but you go ahead and do it anyway where those were always the most successful investments. And as I said, I don’t know how you measure that, but ones where there is a lot of controversy and where there, there are lots of reasons not to invest.

STEPHEN CLAPHAM: I don’t know, I mean, it becomes such a difficult game, doesn’t it? Because when we were talking earlier about value investing this morning, I was looking at a stock in an emerging market for a client.

STEPHEN CLAPHAM: And this stock is, I mean, dirt cheap, it’s a bit like curries. So we were at the London Value Investor Conference. Nick carriage proposed curries. And I said, well, that is like one of the cheapest stocks I’ve ever seen. It’s on 7% of sales. It’s on 7% sales for a good reason because it’s been over earning in the last couple of years in COVID. Everybody’s bought a new laptop. We’re going into an economic downturn.

STEPHEN CLAPHAM: So nobody’s going to buy a new laptop. It’s gonna be a massive delta in the sales. And of course, it’s a question, it will probably survive and be the last man standing. This, this stock reminded me of Renault. And I actually, so I, I used the analogy of Renault because I remember Renault being on a negative enterprise value in 2011 2012. And for a couple of years, the stake in Nissan was worth more than the business.

STEPHEN CLAPHAM: If you’d bought Renault at a negative enterprise value, I looked at this morning, you would have lost money over 10 years in spite of the stock market going up 2.5 fold in that period, we did, by the way, we did buy Renault in around that time.

RICHARD OLDFIELD: And, and we, and we did very well with it, but there are kind of, there are no permanent truths in investment. And one of the things which dis persuaded us out of Renault, and this is pure sort of coincidence we thought in this way, actually, I’m talking about a period before 2011, way back in, in the two thousands because I, I mentioned this in the book published in 2007.

RICHARD OLDFIELD: 1 of the things which we’d made good money in Renault. One of the things which dissuaded us out of Renault was a concern about Carlos Go.

RICHARD OLDFIELD: Well, I had no idea of course what was going to happen to subsequently. But I’d say in the book in 2007 that we were concerned that about the premature beatification of chief executives because he was treated as somebody who, who, who could do no wrong.

RICHARD OLDFIELD: And it was a great contrast at that time. So this would have been around 2005, probably with with Steve Ballmer at Microsoft who was regarded by the market as somebody who could do. No, right.

RICHARD OLDFIELD: And those were two little factors. They were obviously part of a much bigger consideration, but which made a sell. Now we bought Microsoft at roughly the same time, or we had held it, I think for, for some time before. So I think that again is coming back to the business about falling in love with chief executives.

STEPHEN CLAPHAM: If the market falls in love with the chief executive be were funny because go was such a major proponent of electric vehicles and Renault could have been Tesla. Absolutely. Kind of a funny, sorry. The other thing I loved in the book was the Rip Van Winkle Investor. Tell, tell us about that.

RICHARD OLDFIELD: Well, I, yes, I, I I mentioned this asset management company called Rip Called Asset Management where the, the, the boss invests and then he falls asleep and he wakes up in 2025 years and sees how things have done and I use this Apo Russia and, and tell you about that in, in about 1997. Yeah, 1997 having made my first ever trip to Russia and decided that I knew all about it.

RICHARD OLDFIELD: I said at a meeting, I think it’s safer to invest in Russia than in Coca Cola.

RICHARD OLDFIELD: And that as I write is one of the silliest things I’ve ever said.

RICHARD OLDFIELD: But by 2007, even though the Russian market went down 90% after I had said that remark by 2007, it was up by about three times from, from before it went down 90% and it was up sort of almost infinite times from of course from the bottom.

RICHARD OLDFIELD: Whereas Coca Cola had drifted sideways and down fairly consistently for several years from 1997 when it just about peaked to 2007. And so the point of this was that if Rip Van Winkle woke up and he looked to see how these two things had had gone, he would have said, well, Coca Cola is definitely less safe than Russia because I’ve lost money in Coca Cola and I made a lot of money in, in Russia.

RICHARD OLDFIELD: And so it was the silliest thing I’ve ever said. And of course, recent events have kind of consolidated that I mean, or confirmed that it was a silly thing to say because a market like Russia is not like a company like Coca Cola.

RICHARD OLDFIELD: But the point of it is that volatility, it was, it was an exaggerated way of saying that I think investors pay too much attention to volatility if they’re truly long term investors. And that’s a very big if, but if they are truly long term investors, then they don’t need to worry about fluctuations from year to year, month to month, quarter to quarter.

RICHARD OLDFIELD: And they should be prepared to take probably greater volatility than has become customary in the last 20 years. So of course, it is a a very obvious philosophy, but it’s actually just incredibly difficult to execute, but it is difficult to execute and you and you really have to have this seriously long term view, you have to be prepared to look at 10 years.

RICHARD OLDFIELD: I mean, I think that the statistics that the statistics on which the view that equities provide a real return of five or 6% are based, only get comfortable when you look out at a 30 year horizon. Andrew Smithers has just written about this and for periods of 20 years, for example, you’re not on safe ground. It’s only when you get to about 30 years that you get on safe ground.

STEPHEN CLAPHAM: And of course, we’re looking at a relatively small set of 30 years.

RICHARD OLDFIELD: I mean, you know, you, yeah, I think he, I think he, I think the records now go back rather amazingly, but they go back to the early 18 hundreds. I don’t know what they had in, I don’t know if you have, you looked at the, what, what stocks were there in the early 18 hundreds.

STEPHEN CLAPHAM: It’s a really difficult thing to research actually. And I have done, I have done a bit of work funnily enough. The Bank Of England’s got great content on its website. It’s got a lot of historical content and it’s been fascinating talking to you, one of the things that I always like to ask people is what would they advise a young person entering the industry? And typically, what books would you recommend someone?

RICHARD OLDFIELD: Well, I think the, I think Ben Graham is, is sort of it’s rather like what you take on Desert Island discs, you, you’re allowed to take the Bible and Shakespeare. Well, you’ve got to have Ben Graham.

RICHARD OLDFIELD: And so it’s in addition to Ben Graham, I think one of my favorite books about investment is a book about this man. I mentioned earlier, Peter Cundall who was a Canadian value investor hugely successful in his career as a whole long, long periods when it went badly wrong, patience, patience, patience was his mantra. And there’s a book about him written by Christopher Risso Gill called there’s always something to do.

RICHARD OLDFIELD: And I think that is first of all, I think the title is very good because it’s true in investment. There is always a corner of markets which has been neglected and is attractive. Even when a whole lot of other things look very overvalued, there’s always something to do. And, and secondly, it is absolutely the life story and the philosophy of a very brave, deep value investor, which he was, oh, that’s great.

STEPHEN CLAPHAM: But a book I’ve not read. I’m familiar with, with him, so I’m looking forward to that. Thank you enormously Richard for coming on. I really enjoyed our conversation.

RICHARD OLDFIELD: Huge pleasure. Thank you very much.

STEPHEN CLAPHAM: Well, I really enjoyed that discussion. It’s so refreshing to talk about investing with someone who’s such an independent thinker. I learned a lot that 31% increase in SKU S at Tesco was something I didn’t know. In spite of studying the company and having a position in it, you’re always learning in this game. And I am incredibly fortunate to be able to use this podcast to advance my education.

STEPHEN CLAPHAM: I love talking to experienced wise investors like Richard who are full of common sense and good advice. Let me know if you have ideas for similar guests. Thank you for listening and please don’t forget to leave us a review or rating an Apple podcast.