187: Investing & Philanthropy - With Sir Chris Hohn, Founder, TCI Fund Management & CIFF

0:02I'm particularly delighted to release today's episode. In October, we held the inaugural Money Maze Allocated Summit. And over the two days, there was fantastic discussion, debate, insights, disagreement, and a lot of learning. But of all the conversations, one that particularly resonated with me was the chance to interview Sir Chris Hohn about those two topics with which he is fantastically acquainted, investing and philanthropy. be. And I think that you will discover in a minute that he perhaps stands above most mortals with the clarity of his thinking and the extraordinary generosity and effectiveness in both disciplines.

0:39Thank you. I have had the pleasure of interviewing Chris Hurt twice before and we are really, really appreciative of you being here today. Thank you so much. I think your investment success is probably only matched by your philanthropic generosity. And we're going to talk about both of those today, investing and philanthropy. And I'm conscious a little bit like an earlier panel with Tor Burney, I would really like a couple of hours, but unfortunately that isn't possible. So will you come back next year? Chris, what's made you successful? Well,

1:21Sir Chris Hohn:thanks for inviting me, Simon. Well, investing is all about risk and return. And the vast majority of investors focus on return. That's what you see in any asset allocator, what's your returns. That's the only thing. But I focused actually in my career on risk firstly. you know return does matter but to me risk was always the first thing that mattered and a lot of people have their own definitions of risk I love George Soros's definition which was not knowing what you're doing

2:12Sir Chris Hohn:so what does that mean you know for me that's understanding what matters in investing and there was a spiritual master once he said very few things matter and most things don't matter at all and that could also apply to investing so what does matter competition matters because too much competition erodes your profits and maybe you don't make any money at all so I hate competition and makes

3:00Sir Chris Hohn:predictability and valuation impossible and the interesting thing so to me in a sense competition and disruption are the whole thing it's not about growth because you can have a first move advantage, growth for a period and then a new technology or a new competitor kills you off and the fact of the matter is that most investors underestimate the forces of competition and disruption because they underestimate complexity they look short term and so we do two things really. We're looking for such companies and with such high barriers to entry over the long term that we think we can have a reasonable idea that they'll be around.

4:02Sir Chris Hohn:Can't be precise about exactly what they'll be worth but they'll be there not in one, two or three years which is a normal time horizon of an investor but in 20 or 30 years, which is the time horizon where the value, if you do an MPV model, really is. And so we really try to get, focus all our time on barriers to entry and disruption. and so and the second component of the philosophy if you like is long termism now that's fundamental our average holding period of a stock in our portfolio is 8 years we've held stocks for 13 years and 12 and 10 but the average is eight years, which is like starting to get into private equity land of duration of investment.

5:09Sir Chris Hohn:And it's counting, eight years and counting. Now, you may, but it's an interesting question. You know, a lot of people make money with high frequency trading. The shorter the trading horizon, the better. The average stock holding period is under a year of a stock in the U.S. So it's all very well to say you're long term, but that's only a good thing. It's not necessarily a good thing unless it works. And it only works if you're right on the first point about the quality of the company and the barriers to entry. But if you're right, that you find a company that is going to be a good company long term, then you should hold on to it.

6:02Sir Chris Hohn:Because there's a persistency of these barriers to entry and the things that make it good. So in simple terms, good companies stay good and bad companies stay bad. And I guess there's another point. There aren't that many great companies. the super companies of the world and if you find them you should hold on to them so that's and then there's related concepts like engagement and concentration but those are secondary to to the first points so let me ask you about those barriers to entry because How has your thinking in identifying them changed in the last two decades? We've enlarged the universe over time of things that we have found that are more companies, more industries, as we've learned.

6:58Sir Chris Hohn:Like everyone, we're always learning. if you're... And the... So I always liked hard assets, infrastructure. The... What came within that, you know, could expand beyond... We've owned a lot of airports and toll roads, but, you know, we found toll roads in Europe, Then we went to loads in Canada and the U.S. through Ferrovial and cell phone towers and railroads.

7:50But then beyond hard assets infrastructure, we found other barriers to entry, such as network effects.

8:01Sir Chris Hohn:And there's certain industries. Payments is one. We've been a shareholder visa a long time where there's this huge, ever-growing network connecting every customer and every bank. to the world. And as the network grows, it becomes just ever harder to replicate.

8:28Sir Chris Hohn:Aerospace is a sector that we've come to learn about and understand and where the barriers to entry are multiple. Often you would like not just one barrier to entry, but maybe five. Intellectual property, you could have its brands, hard assets, contracts, network effects. We have big shelters and aircraft engines where you have many of those IP, contracts, installed base is another barrier to entry where customers can't switch regulatory switching costs. and so

9:19Sir Chris Hohn:we've expanded rating agencies there's another one and

9:28Sir Chris Hohn:one of the key points if you really do find one of these super companies that can dominate their industries they have something special which is pricing power which is a rare thing so most companies don't like to talk about it and it's a special thing because it means you can grow more than your volume and it's got a leveraged effect because if it's above inflation so pricing power means you can price above inflation then there's no cost to that and if you have a 10 % margin, it might give a huge, every one point of real pricing is massive. It's super leveraged and potent and so the

10:26so

10:28Sir Chris Hohn:the but I think the world is changing so much that that some of these moats, apparent moats, are being just beaten down by AI and other disruption forces. So the forces of disruption, I would say, are actually rising. So that was what I wanted to get to. Disruption is around us. You've got access to all sorts of great global people, great conversations, but how do you think about identifying those underlying weaknesses that may derail the thesis? Well, you really want something that's obvious. Warren Buffett used to talk about this, if you can't put it on. And when it's not obvious, you probably just leave it alone because it's probably not sustainable.

11:21Sir Chris Hohn:So it's sustainable barriers to entry. So if we own an airport, it's pretty obvious. We own a company that owns all the airports in Spain. We've owned it for a decade. I was on the board. No one's ever going to rebuild those and overbuild you, and 75 % is unregulated. So when you look at it, the shops and – so the infrastructure piece is – especially if you're in it unregulated, all roads where you have 100-year duration or 60 years like for OVL, those are – people – we don't know whether people are going to drive electric cars or which brand of electric car. but it's pretty clear they're going to need these roads and so those are obvious things.

12:13Sir Chris Hohn:I'd say when you have multiple of these barriers to entry there's no alternative option. So we like aircraft engines but will there be an alternative technology? Will they become electric? The science doesn't really permit that and it's too expensive to replace the existing fleet so you've probably got a pretty good visibility on 25 years. And so we think technologies that change quickly aren't good for us. Can't predict them. So I would say some principles would be multiple barriers to entry and essential need, something that is essential. So you've got to be confident of the need. So are people still going to want to fly?

13:11Sir Chris Hohn:We believe that's a durable need. So we don't like discretionary things. I've never been an investor in the handbag business. Lots of people have and they've made lots of money in it, but I've never understood what makes one handbag better than another.

13:35Sir Chris Hohn:But it's why it's essential. So anyway. It may well be. I don't need to understand everything. Yeah, just stay within your sphere of competence. That's what Buffett said. But we have this, what is fabulous about the investing business is it's the quantitative meets the qualitative. And you've written a lot about engaging with management. And I wonder when you go to meet managements today, you've done this for a long time, what are you thinking about that conversation? People think, read about us and they say, you're an activist. Well, we've done that. It's sort of a tool, but we prefer always to have constructive, long-term relationships with management.

14:33Sir Chris Hohn:And we hold an Investor Day in New York every year for our investors, and this year we had the CEO of G Aerospace, the CEO of Airbus came to speak to our investors on the stage at the same time, never been done before. CEO of Moody's, CEO of Vinci, top executive from Visa. And every year we have the same thing. and these people come because they think we can add value to them.

15:16Sir Chris Hohn:Our aerospace analyst was invited by GCO to speak to their top 300 managers about the company. So that's not normal. Why do they do that? Because they think we understand the company and we can add sometimes some value. They find it a value-added conversation. So, because we do so much research on a company and we follow the industry, so we want it to be a relationship, okay? And that means, and it to be a conversation. Now, of course, we weren't always like that, but we've evolved. And so I'd say it really is engagement. Through engagement, you can learn something. If it's a one-way conversation, you're just speaking at someone, you don't learn anything.

16:10Sir Chris Hohn:We have to learn. But along your way, there will have been some investments that didn't work as well. And I wonder when you reflected on those, was there something in those conversations that maybe you weren't as sensitive to that maybe you are today? Ultimately, the quality of the business trumps everything. And so, you know, I'd say it does management matter, you know, somewhat. Yep. It's not the key thing. and a great manager in a bad business, they can't really necessarily do much. And so I think focusing on trying to assess management through conversation may miss the point. Okay. So I think you may overstate the value of the management and sometimes management won't even necessarily understand their own pricing power and latent pricing power or, you know.

17:26Sir Chris Hohn:So, but I think, I don't think the, I think it's, if I would say something on the question, you've got to listen and see if you can learn and be humble if you've become arrogant. That's a killer in the investing business. Yeah. I'm trying not to say anything.

17:53So before we continue this conversation, we're going to take a short break to have a note from our sponsors. IFM Investors is a global asset manager founded and owned by pension funds with capabilities in infrastructure, equity and debt, private equity, private credit and listed equities. They believe healthy returns depend on healthy economic, environmental and social systems. And these are evolving on a scale never experienced before. To find opportunity, build value and meet the needs of future generations, you need scale, skill and expertise. That's what IFM Investors has built up over 30 years.

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19:03Given that there are stretched valuations in all sorts of parts of the world, you have been very comfortable shorting in the past. Sort of under what circumstances might you have more shorts than you've had of late?

19:15Sir Chris Hohn:You know, I've never really been a significant short seller. I don't think I've cumulatively made absolute money in it. And I sort of agree with what Warren Buffett told me one night I had a dinner with him and I asked him about shorting. and he said he didn't do it because he and Charlie Munger concluded it was just too hard, too unpredictable. He thought long and hard about it because in shorting you need to also understand investor psychology because when a short goes against you, you have to fund the losses. People think that's like a costless thing, but you have to sell longs to fund the losses on shorts.

20:06Sir Chris Hohn:And you can eventually be right, but can you hold your position? You know, we were, we did have a short a couple of years ago in Wirecard, where we thought it was a fraud, which is, we have a very high bar. and actually I I I propel timing I filed a public criminal complaint against the company in the Munich Prosecutor's Office the company wasn't too happy the chairman used to be the CFO Deutsche Borsi said I was a liar but within two weeks it was bankrupt now and then the media got involved and they went to Australia to meet a guy at Bronte Capital who was one of the very first short sellers of Wirecard 20 years ago.

21:02And they said, the journalist said, congratulations.

21:05Sir Chris Hohn:Yeah, this must be a big day for you. But the stock could have gone up 20x. And he said, I had to cover it after a year. I couldn't fund the losses. Yeah. So I wasn't here to see the day it went bankrupt. Yeah, I lost. So it's a very hard thing. And you could be squeezed if you watch the movie Dumb Money. It's a great movie. You'll see the difficulties of short selling, of being short squeezed. So there's so many technical issues that sometimes you just have to experience tells you. It's just too unpredictable. And because of the investor psychology point. Yeah. So it's interesting. I see the front row is Chris Dale of Kintbury Cabin, who also successfully shorted Wirecard for a while.

22:12And well, right to the end, actually, as it happens. And I'm an investor with him, which is why I know. What are you most excited about when you think about the investing landscape?

22:23Sir Chris Hohn:I like things that will just compound long term. I don't change year to year very much. So, you know, things that I feel confident will be around in 30 years in a dominant position excite me because it's just predictable. I value predictability. Yeah, it's and sometimes people, you know, your very question illustrates what most investors are looking for, the next hot thing. Yeah, the new thing. And sometimes I'll say a little bit sarcastically, Will, you want to say what's new? I say, do you need to change your wife every year? Yeah. It can be a difficult conversation. Robin always says don't ask that question.

23:23Sir Chris Hohn:Because people might give them ideas. what do you know by the way that I don't know

23:35Sir Chris Hohn:you wouldn't ask that question because you're happy with it you're happy with what you've got and so

23:45Sir Chris Hohn:it's not that easy to find there's some truth in some of these funny examples it's not that easy to find the right partner it's not that easy to find the right investment so why do you want to change them immediately if you find something good it's going to be good long term stick with it and don't um think that newer is always better this is what investors think they don't think about sustainability they want the next hot thing they think growth is the thing but new is the thing but that you know we want to be because so many people think in terms of what John Keynes or actually Benjamin Franklin, not Benjamin Franklin, but Benjamin Graham said that in the short term, the market is a voting machine.

24:39Sir Chris Hohn:What's hot? Yeah, it's new. But in the long term, it's a weighing machine. Yeah. So in the COVID Peloton was hot. Yeah. Went to$50 billion valuation. Everyone was on their Peloton machine, but they don't, you know, virtually went to zero.

24:58And so,

25:01Sir Chris Hohn:yeah, I think that's the most important question. We're more interested in the question what's going to be around rather than what's new. Very clearly expressed. Let's switch to philanthropy. Why? Yeah, so Simon and I talked before and you had a lot of questions on how. I said, there's a book. The title of the book is Let's Start With Why. Yep. That's a better question to start with.

25:40Sir Chris Hohn:It was