Transcription
[Music] Hi everyone, I'm Nikolai Tangan and today we are joined by one of the best investors of all time, actually. So Chris Horn, not only is this fund TCI one of the best and most successful funds that Europe has ever seen, but also the charity is one, now one of the largest in the world. So, uh, Chris, you continue to have an immense positive impact on the world. Thanks for coming. Good luck.
Let's start with, um, the investment world. What makes a good investment? I think this is, uh, something a lot of people, uh, get wrong. They, uh, they think it's about growth, often. Okay. Or something new. Neither of them, those things in themselves are, to us, um, uh, matter by themselves. The most important thing, and without which it's, um, in, in, um, for the, let's say, the types of investing that we do, is high barriers to entry, the moats that Warren Buffett has talked about.
Now, can, before we dig into that, can a distressed asset, of a, you know, a piece of real estate that's selling at half price because of a liquidation, also be a good investment? Yes. So, can there be a role for cheap, average assets? Yeah, let's call them low-quality assets, which are trading at big discounts to replacement cost. Yes, that, that's the, that's the type of investing that can work. Yeah. That I've, I've done in my time. Yeah. Cheap, average businesses or cheap, bad businesses. But I'm, I don't feel that I can have any confidence in that type of investing, um, because the, um, the earnings power of those average businesses is unpredictable.
Well, so what are good moats? The most important answer is ones that are sustainable. Okay. A lot of people, uh, and ideally, you would have multiple moats, multiple, uh, pieces of defense. And there are many ways. A moat is basically something that means that the business is difficult to replace. Yeah. Uh, difficult to compete with. Yes. And replace, two, two, substitution risk and competition risk. Yeah. Those long-term become very difficult because, why is it so important? Competition kills profits. Yep. That's as simple as that. Substitution eliminates your business.
So we look at, um, um, there, there are many, many moats. One which most people don't look at, uh, most investors don't really look at, actually, interestingly, is irreplaceable physical assets. Okay. We're in a world where people, uh, just look at earnings. They don't look at, uh, asset value or physical assets. And, and, uh, um, and so we like quite a bit of infrastructure. Um, airports, for example, um, one of our investments, which has been, um, the airport group in Spain, where the government privatized. Yes. Aena. And, um, you just can never, they'll never build a second airport at Madrid or any other places. These are, you know, natural monopolies. And, um, so, but that also applies to toll roads and railroads and, um, telecom towers. Um, so, uh, there are many forms of infrastructure, transmission towers that, um, um, are hard to compete with because they're natural monopolies where, um, where, um, of course, some of these things can be overbuilt, like cable. So there's a form of infrastructure, but it, it's, it's, it's usually you have to look at the details of case by case. Very unusual to try and, and usually go and get the planning, uh, to build a second airport. No economic case to it. I mean, I can't remember how long they struggled to get an extra runway at Heathrow. Right. So planning, exactly. Planning. And then, uh, roads, there's no economic case to build a second road, or you don't have the land. For different, uh, literally no. So, so infrastructure is physical assets. That's one. A second is IP, intellectual property. That's right. And, uh, which is so advanced, okay, that it's very difficult to replicate. Well, so what kind of intellectual property are you thinking? Um, one space we like is aircraft engines. Um, and, uh, there, it is a very complicated product because the, um, materials complexity, the, the, the engines run at such high temperatures that metals melt. And so many different things have to come together. Yeah. Thousands and thousands of complex parts. So that's one where that's a business where there are only two players in narrow-body engines and two in wide-body. And there have been no new entrants for more than 50 years. The last new entrant was GE. And so that tells you something. Yeah. It's a big industry, but it's so complex, very hard to enter.
Another, uh, barrier to entry is, um, uh, installed base. Okay. Which applies to the aircraft engine business. Once those engines are there, they, um, for various reasons, you get the spare parts business on it. And, uh, another, um, of, uh, barriers to entry is scale, although that's, that's not a, uh, a guarantee of, of, uh, competitive, um, moat. Um, network effects is another important barrier to entry. You can see this in assets like Visa, Meta. Yeah. Two examples of, um, network effects. And brands are another barrier to entry. But I'm not saying every brand is, is powerful. But, you know, you think about a McDonald's, it has a value. There are some brands which are powerful and sustainable, but not all. And I'll mention one more, um, moat, which is customer switching costs. Take mission-critical software. Once it's installed, uh, companies are very reluctant to, to mess with it and, and, and switch because of the complexity.
How important are recurring revenue streams for you when you look at businesses? It is important. Um, but the predictability of when they recur is not. Okay. Let me give you an example. So what's most important for us is something slightly different, which is an essential product or service. We don't like things which are discretionary. Okay. So one space we've invested in for a long time is rating agencies. And here, these are the, these are the people who basically give kind of character to different type of, yeah, they say, is it good or bad? Yeah. Yeah. To people who invest in bonds, uh, they say, is it investment grade, non-investment grade, give for research and, uh, bless it. And, uh, there, you can actually defer. An issuer pays for the rating, but they don't have to, um, refinance their bonds, which is a big part of it in any given year. M. They can delay and defer, but eventually the debt has to be refinanced and, and, and, and rated. And so there's a, and so I think essential need is, is, is, uh, the, the bigger point. But, uh, usually our companies have, yeah, recurring and predictable revenue streams of essential products. I, yeah. And so do they have to grow? Depending on valuation, not necessarily. Um, and, or not, not necessarily at a fast rate. Okay. And you, and growth can come from two forms, volume and price. So you have to break it down.
Now, why isn't growth as important as people, investors, usually assume it to be? Um, because you can have profitless growth. The airline industry, over a hundred years, has had a lot of growth. Airline travel has grown at 5% a year. Yep. Continues to grow, uh, consistently. But airlines, as a business, cumulatively and collectively, have made almost, you know, minimal profits. Yeah. Despite growth, because of the very low barriers to entry. And so, um, so I, I would say growth without barriers to entry is, is not a combination that you, you want.
Some of these businesses are quite, uh, capital intensive. Like, it's not cheap to build an airport. Yeah. Does that matter for you? Well, you have to look at, like everything, into the detail. And some airports, uh, are, um, well, all airports have regulation on landing charges. But some, the non-landing charges are unregulated. The shops, the advertising, the, the VIP lounges, the parking. Yep. And, um, the so-called dual till regulation. One till is regulated, one till is unregulated. And those are very low capital, in, in, intensity. Yep. It's, it's, it's, in effect. Yep. And, uh, and high returns on capital. They grow, um, because there's more and more demand for travel. And, so, um, so, and again, capital intensity by itself, it's part of the equation. Okay. But it's still, um, um, um, and it, it tells you how valuable growth is. Okay. But what trumps, if you don't mind that expression, what trumps the, uh, the all of this? Still, it's still a valid expression. Don't. Yes. What trumps all of this is the, the, the, the, the barrier to entry. Okay.
What about regulation? You've been, you've been big in things electric. Yeah. Yeah. I'll go into that, but I, I want to go back to the, the point about growth can come from two forms, price and volume. Okay. And most companies don't have pricing power. They can only price, if they're lucky, at inflation. And that's why people don't focus on it. They don't even look at where growth comes from. They just assume it's volume plus inflation. But there is a special group of super companies that can price above inflation. And that's, as Buffett taught, the test of whether you have the moat. Okay. And this real pricing power above inflation can be very valuable because if you can price 1% above inflation and, and you have a 20% profit margin, your profits will grow 5% faster than revenue. And, um, people don't go into it or analyze it because there are so few companies that, that have it. But, but, um, this is something we have, you know, a lot of our investments have this because incremental pricing is pretty much all profits. That's right. And it's very potent if you have the, lower your margin is. So this is why you asked about growth and is it, how important? If it's, if you're asking about volume growth, but I, and I have low volume growth, but I have a lot of pricing growth, that's actually more important because of the leveraged effect of, there's no cost associated with it. M.
Regulation. Yes. Um, you have been in a lot of regulated businesses. So you mentioned airports, but you've been in Red Electric, which is like an electricity transmission company. You have done quite a few of these things. Yes, I have. And actually, it's a general risk. Um, because if you have barriers too low, competition or substitution eliminates your business and your investment. Barriers too high, regulators may come knocking on your door. Yep. M. Every case is different. Yeah. And, um, the ideal case is you, that there is competition, but weak competition. And apparent competition. Okay. So tell me, what is apparent competition? Yeah. Well, it, it's really weak competition and rational competition. Okay. So, um, take some water examples. Um, um, Pratt & Whitney competes with GE and Safran. It has a 25% share of new orders. It, it can, as a product, but it's not nearly as, as good. Yeah. It's, it's got 35% of its engines grounded, multiple technical problems, just has lost a lot of trust, but it's, it's there competing, um, and, um, a, and, uh, for new engines. Yeah. But price isn't the most important thing in this industry. Reliability is. Yeah. And so you, um, and so, and as it struggles, it has to raise prices because it's got to, you know, lots of difficulties. And sometimes where there is competition, that competition chooses, uh, not to compete, you know, generally speaking, not a specific industry, um, decides to be rational, yeah, and, and, and, and compete on, you know, non-price-based, uh, approach. Okay. And then the detail matters. So you might have looked at Heathrow Airport and see, oh, that airport is fully regulated. Airports can't be good. But if you look into the detail of Aena, it's a different animal. It has a piece that's regulated and, and a much bigger piece, 70% of the value, maybe more, which is unregulated. Yeah. And so, uh, maybe the unregulated business, the regulated business will give you a bond-like return, 7%. But the unregulated gives you a much higher return.
Do, do you see now the other group of businesses you've been, uh, very big in has been the stock exchanges? You know, you both do stock exchange and so on in the past. Yes. Yes. Why are they, why were they so good? In the case of, uh, Deutsche Börse, starting with that, they had a derivative business called Eurex, which was a natural monopoly. It was a network effect. This was the barrier to entry, the liquidity, uh, of a marketplace, um, for, uh, trading bond futures, European bond futures. It, the network effect of getting best prices in, in, the most, uh, liquid market meant it became what it's termed a winner-takes-all or natural monopoly. And once you have that liquidity, very hard to move people away. Price, you can never compete on best price. And London Stock Exchange has that for LCH Clearnet's business, a clearing business. So where an exchange can, CME has it on US, uh, futures, establish this natural monopoly by being the first mover. Okay, the winner-takes-all. Then, these exchanges can be, be very good. But of course, they've changed now. London Stock Exchange is in many different businesses, sells data, and half their earnings are from data. And that's non-proprietary data, reselling non-proprietary data. So it has a vulnerability on that piece. They're no longer just what they used to be. Um, and then there was a lot of growth without capital. Yeah. As people came and traded more, as capital markets grew, you grew without capital, which was, uh, was very valuable.
What are the type of companies you would never invest in? Type of industries. Yeah, that's a good question. We have a long list of companies we don't invest in. We're very focused, and we call them the risky and bad industries. Uh, and that's, and I have invested in some of these in the past, but I've learned. Banks. Sorry for that. There's a bank. We are not the banks. We hate the central bank. Central bank. Central bank is good. Yes, central banking can be good. But, uh, we don't like banks. We don't like banks. And why not? Why not? Why not the low quality of earnings? Because they're very leveraged. Um, and, um, uh, much more than people think. You know, because people look at, oh, equity to risk-weighted assets, but equity to total assets. Many banks have been, have run it a hundred times. And so, two, they're opaque. Ah, you can't look into them. You can't, yeah, you can't. Uh, I remember, um, pre-financial crisis, I had a look at Credit Suisse and I sat down with the, the then CEO, Brady Dugan, and said, put his balance sheet in front of him from the, the annual accounts and said, you have a multi-trillion dollar balance sheet. Can we walk through the line items, 'cause I don't understand it? He said, I don't either. He was a very honest guy. I really like, very, yeah, very honest. And, okay, so banks, you don't do it. What else do you do? And the other reason for banks is very important. You know that sooner or later, you may find someone without a lot of intelligence comes to run them, and then it can be toxic. Yeah. People going for growth. Anglo-Irish Bank, if you remember that one. Yeah. Of course. And they just, uh, can destroy the shareholders. Yeah. Uh, by getting, uh, bonuses, you know, Bear Stearns, you know, and non-alignment of interests with leverage and, and opacity and, uh, and, uh, so what are the others? Oh. Oh. Many. The auto industry is obviously a commodity. Retail, you know, um, insurance, um, the, um, commodities, the, uh, commodity manufacturing, tobacco. The, the truth is, uh, yeah, anything in, in, most things in manufacturing. Okay. So, so most industries, most industries are bad industries. Yeah.
So Chris, it doesn't leave, it doesn't leave a big universe. Correct. We say maybe there's 200 companies that we consider to be, um, high quality and investable. Um, and, um, I mean, I'll list you a couple more. Traditional asset managers, bad businesses. Yeah, speaking as one. Um, uh, fossil fuel utilities, bad businesses. Airlines, bad businesses. Um, wireless telecom, bad businesses. We think media is bad. Um, advertising agencies. You know, it's a very long list. Why? Because it's competitive, with existing players and new technologies. And the one important thing that, um, I've learned in my time in investing is investors underestimate the forces of competition and disruption because they just look today. Maybe there's a new company which has a first-mover advantage, but then competition comes in. Yeah. Substitution and, and, um, where does it, where does it leave the big US tech companies now? Yeah. So there's a lot of power of incumbency. This is another important point. So let's take a company, um, Microsoft. Okay. Which we've invested in. Um, and one of their barriers to entry is, um, bundling. Okay. Or the, or maybe because of it's, it's, it, it, um, it creates a customer switching cost. What, what do I mean by this? So, the Office franchise, which we're all familiar with, has many, um, products in it. You know, your, your applications, word processing, Excel, your email, um, security, different things. And they, and they sell it as a bundle. Yep. They don't disaggregate it. And when a new, um, product or a potential competitor enters, um, they can add it to the bundle. So Zoom came out with video conferencing, and they could have potentially, you know, added all the things Microsoft does to that. So Microsoft had to respond, and they launched Teams, and they were able to distribute it through the bundle. Yeah. Free to everybody. And even though Zoom, some people believe it was a better product, or is a better product, Microsoft won that battle because they had the installed base, the incumbency, which we talked about, and high switching costs for, um, because once people are using their, their Office software, they don't want to switch. And so people started using Teams. Okay. Something given to you free. Why? Because it was good enough. Yeah. It didn't have to be the best. If I, if it's free. Yeah.
What about the other tech companies? We have a, a position in Alphabet. And, uh, which is, um, maybe our most risky investment. Um, um, where clearly the company, it's just one of our smallest investments as a result. It's, it's, and where we have some level of protection because it, there are businesses like YouTube and, and their cloud business, which represent half the market cap today, and the cash, and other things. So, it isn't all search. But search is, is critical. And, uh, and so can they out-innovate, um, competition? Yeah. There's a risk of search fragmenting, you know, as competitors come in, and try to. But, um, it's a question mark. Yeah. We don't think so. We think they have a lot of advantages, their data to have to, uh, offer higher quality, um, search results. And, um, but competition is increasing.
Talking of which, how do you think AI will change the investment landscape here? It's going to increase, uh, disruption in, in, in ways we can't even predict. But there are, uh, things like call centers, un, will, will all go bankrupt. And, uh, another segment is Indian outsourcing companies. Yep. Who do coding and, and, and things like that. Um, demand for those services could collapse because AI can do coding, you know, at, at, with half the people. Yeah. Mhm. Yep. So, so there are, but AI will, will increase the productivity and lower the cost base of all, all companies. And so if you have a company with these barriers to entry, it's going to be worth more. I think, uh, for generally competitive businesses, if you don't lead, you could become uncompetitive and be disrupted. Yeah.
So now, um, we have identified one of these companies, let's say, I don't know, Aena or Rolls-Royce or Microsoft. How do you value these companies? What, what is your valuation tool? Are you? We don't even look at that until we get comfortable that the barriers are so strong, it will be around now. Okay. So barriers, fine. We think it will be around. Yeah. We think it'll be around. We think there will continue to be an airport in Madrid. Right. We'll do reference checks on, um, relevant people. Okay. So, and see if we're missing something. So, we, when we were looking at investing in aircraft engines with, uh, we spoke to the, a CEO of a former CEO of one of the, the, the competitive companies, and he confirmed their thesis and, and, and actually said the margins should be much, much higher. Okay. Okay. And over time, they, they will go there. So that, that's, uh, one of the pieces of diligence. Um, we will assess management where I think it's important, but not critical, if you have the right assets. Um, through, ideally through, through meeting them, um, uh, the, uh, talk to competitors, get their view. Um, and, um, um, look at competitive companies, look at the track record of the company. And usually, you don't understand everything. And usually, the things you find out are, are bad things. And, um, I think we'll discuss it with our team, and we want to hear competing views. Yeah. We have some members of the team who are just inherently bearish. Yeah. And they're, they're good for testing the bear case. We always want to hear, how could technology disrupt? Yeah. And, and just what competition? And, um, are you a bearish guy? Um, not particularly. No. I, I've, um, yeah.
What, but what kind of valuation metrics do you, do you look at? P/S, cash flows? Do you do DCFs? So you have like 50-page spreadsheets, all of those, right? All of those, but not 50 pages, you know, that's, that's, uh, but a very. But really, honestly, um, one of the things we learned is there's a really important point is that we can have an advantage through long-termism. Mhm. Okay. Which is the average stock is held by an institutional investor by under a year. Or the stock market in the US. How long do you hold it? Average holding period of our port, current portfolio is eight years. Eight years. Yeah. That's, yeah. Eight years. I'm not saying that's the limit. It's just, uh, the, we've on average, some we've held for 13 years. Some new investments like GE Aerospace, two years, but the average, weighted average holding period is eight years. Yeah. So, but it could be 10, it could be 20. So I, I love long-term, right? But how do you install that type of thinking into your organization? I mean, we don't, straight out of business school, out of business school, you want to, hey, I mean, you know, went to Harvard like you did, or whatever. It's just like, hey, let's do some stuff. Come on, let's do some stuff. Yeah. And it's just like, hey, okay, let's buy something and hold it for eight years, right? You come home to your partner every day. It's just like, they do nothing. Then you, we really, um, you know, if you are in the private equity world, that's normal. Yeah. A private equity fund would hold an investment for their 10-year life fund, normally. Yeah. Or longer. 12 years. Yeah. As, as you know. And so, and so we, we, it's an, it's an overused expression for some or misused. We take a private equity approach, i.e., that we have to hold the company forever because you, the stock market maybe at, at very, uh, bad prices when you want to sell. Yeah. If you need to sell, and, and, and so I really think you, you need to have that approach. And, um, and so the way we, we really like a long-term valuation is DCF, the most important things. And here's the thing, DCF, you take the cash flow and you discount it today. Yeah. But here's the thing, is, and the, um, the longer you can look out, if you've got a great company, the more value there is. Take a company we own, Moody's. Moody's, a rating, a rating agency. So it's been around 100 years. What do you think the average, I can ask you a question. Make it fun. What do you think the average revenue growth over that 100 years has been? Uh, I'm going to look like a total fool, but, uh, 100 years is a long time. 7%. 10. Wow. Yeah. You know, a very, that's a very unusual number over a very long time period. And so investors have always underestimated its value, including myself. Yeah. And, um, I bought the stock during the financial crisis at 10 times earnings. And then, and then I even bought shares Warren Buffett was selling, uh, and reduced his stake from 25% to, I think he's got 15%. And, uh, Butcher and, uh, the. Are you kind of, are you kind of secretly pleased having bought something cheap from Warren Buffett? Yeah, but then I sold it. I doubled, I doubled my money. I went from 10 times earnings to 20, and I, and I sold it, uh, at $100. Bought it at $50, sold at $100. I thought I was clever. And then, but the earnings kept compounding. So you buy back. I bought it back at $150. So now it's recently $500, now $400. So it's, it's, it's because actually the intrinsic value compounding matters more than the stock price. If you have a great company, it will grow intrinsic value. Absolutely. And the multiple, here's the thing about the multiples, they matter less than the growth when you look at it over a longer period. But most investors are unwilling or unable to invest on a long-term time horizon because either they don't know what they're doing, which interestingly goes, uh, back to what War, they think it's risky, which goes back to what Warren Buffett was when he was asked what the definition of risk was. You know what he said? Not knowing what you're doing. So really good nugget here is that if you buy something which is really good, it doesn't quite matter what you pay for it because it will grow. And secondary, over a long, well, I say, let's just say it like this, the multiple, to a point. Yeah. Whether you buy, buy it at, if it's growing, it's all math. Yep. You've got to look at the growth rate, the terminal multiple, the, all the multi, things. But if it's increasing intrinsic value at a, at a, at a, at a good rate, you will undervalue it if you look at it over a short horizon. Yep. I can be saying it like that. And if you're, if you're willing to hold it for a long term and extract that intrinsic value growth, it'll be worth to me more to you than other people.
I've heard you say that there are more good companies in the public market than in the private market. Yes. Why do you say that? Because the companies that, that, um, that are sold by to private equity are the ones that aren't as good. Yeah. People. Are you sure? I mean, how do you, how do you, what do you base what you say? Not that I don't. Let's dig into it. Let's dig into it. I know it upsets people who are private equity at all. I mean, we actually, uh, I'm pretty pragmatic about this, but why do you, where do you get back? I happen to think that large companies are more likely to beat small companies in an industry. They have more money to compete. Y. And, um, a, and, um, R&D. Yep. And scale. We talked earlier about scale being key and incumbency being key, um, a, and switching costs. So, um, yeah, we, we, we think it's an, a small company that invents something new. We talked about Zoom. I, it can be crushed by a large company reasonably easily. They can copy. And large companies are usually, you know, too big for private equity. Private equity can't buy Visa, you know, they, they, it's too big for them. Yep. So that, that's size excludes private equity from large companies. Um, and, um, and if a public company is selling something to private equity, usually they're not selling their best businesses. Yep. A, and I'd say, um, um, private equity, like all asset management, is prone to, um, uh, the principal-agent problem, where they are incentivized to gather assets. Let's just say, say it like this. The very best businesses in the public markets, I believe, are better than the top 100 companies are better than the top 100 companies in private equity. Okay. Yep. Yep.
When do you sell a company? When its view of intrinsic value is not as good as, uh, other things, including, including not just value, but conviction. So our philosophy, there are two components to it, if you like. Intrinsic value. Yeah. So the price still has to be at or above, at or below intrinsic value. But there's a second point, which isn't, um, really, um, focused on by many investors, which is conviction. So you, so you lose faith, you lose faith in them. No, I'm saying you need to have conviction when you invest in something at all times. Yeah. And what does that mean? You could call it confidence. What does that word mean? Because there, there's a saying, talk is cheap. You can say, um, this, uh, and you can be wrong. Okay. And so my, one of my first investments, uh, when I worked in New York for a hedge fund before starting TCI, was in an Italian media company, and, uh, Bain Capital bought control. It was like a billion euro valuation, and it went to a 50 billion euro valuation, and then went to zero. It was a Yellow Pages company, which say it. Yeah, you remember it. And, uh, the, the, and when I first invested, the internet didn't exist. And, uh, people thought Yellow Pages were a monopoly, and, and, and they were a, and so the point is, you can be wrong. And certain industries, your risk of being wrong are higher. M. Technology is one of those areas. Absolutely. But if I own an airport, y, that is, or a toll road, let's take a toll road in, that are unregulated, which there, there are, uh, some that we own. I'm less likely to be wrong than if I own a retailer. Yeah. My, my chances of being wrong be, are, are less because I have physical asset backing, substitution risk. So, um, the thesis is much more obvious. Yeah. Because so the, um, and so this, uh, this concept of conviction is, is very important. One investor, yeah, yeah, said to me, I have to be able to sleep at night. It has to be so sufficiently obvious. Which, but you always have, you know, kind of sounds contradictory to, to saying that you, you, you, you can be wrong, because what kills you as an investor is permanent loss of capital. Absolutely. I got a bit of a problem with the concept of, uh, intrinsic value, as if there were some kind of objective truth. Yeah, you're, you're right. You're right. It's, it's, you know, we can't tell the forecast the future. So to, to a high degree of accuracy, you can just say, which is why, um, you can, and the longer you look out, the harder it is. Um, and so we, we look at more simpler tests sometimes. Will the business be around? Yep. Will we still fly airplanes in, in, in 30 years, and, and, and, and, you know, will we want airline travel? Will there be demand for it? And, um, so once you know, so I agree with you. So I, I think that valuation is, is just approximate. You know, we can just say, in truth, with con, with confidence, we have a, a good or great business. Okay. And, as I'm saying, only a small subset of businesses can be predicted, which are the most powerful ones. But exactly how they grow, and, you know, unexpected events, you're right, there, there's no, um, there's no certainty.
Let's move on to from, uh, companies to investors. Uh, and in terms of what makes a good investor, why are you a good investor? Well, I, it's your words. Um, it's important to have humility. Um, but, uh, there was, uh, someone I knew who took me aside once, and he said, "Chris, you and I, we did reasonably well." He said, "We weren't the best investors, we just took the most risk." So I just, which is, which is not true, actually. Yeah. It was, he was, uh, it was an interesting comment that makes you, sometimes when people say a joke or something, you, you wonder, is it true? But, um, I was always willing to look at the company fundamentals and not try to guess the stock market. Okay. And, um, and, and focus on macro or trading. Yeah. So I was always fundamental. Most investors are not fundamental. They trade actively. They look at data points. They say, what's the catalyst? They don't really know what the, the company does. So I think the fundamental approach has been key. Long-termism is key. Okay. Uh, um, uh, another thing we've done is concentration. We've owned a few things. Yeah. We may have 10% type holdings, 10, 10 stocks, you know, 15 stocks. We don't own a hundred things. And I think another key point is intuition. We work with intuition, which is something that is, uh, people find strange. How do you use intuition? It's, uh, it's been defined as thinking without thinking, which is, um, the Buddhists would call a koan, something that just doesn't make sense. We will come back to your Buddhist thoughts later on, but it's a lot of people don't understand what intuition is. It's, it's, it's sort of, uh, well, opposite. I have, I happen to have written my master's dissertation on this exact topic. But so you're, you're one who does, then it's sort of the opposite of intellect. And, uh, so, well, pattern recognition, in a way. You've seen it before. Yeah. That's, there's a word for it. Knowing. Okay. It's, it's, it's all the opposite of intellect. Of course, we'll do analysis, but, but then, um, it's a higher level of intelligence than just intellect. But do you, what do you have intuition about? Do you have the intuition about the people, the situation? What is it? All of it. Okay. All of it. Is someone trustworthy or not trustworthy? And, uh, the, the patterns, patterns are another thing. And, so, you know, we were, we don't do, we rarely short, but we were short Wirecard. Yeah. I know we're coming back to that. Yeah. And, but the, is your intuition now better than it was when you were younger? Yeah. I was not in intuition so much before the last 5 to 10 years. It's been a, a, a change. But I think I always operated with at a, at an intuitive level. And, and it's not just stock picking. When I decided to start my own fund, um, you know, 21 years ago, I just had this intuition that, um, I was in the wrong place and not doing what I was meant to do. And it wasn't about money or anything, but it's, it's, it's when you know you, when I met, uh, my, my, my wife Kylie, you know, you just, there's a point where you just know. Yeah. It isn't an intellectual thing, you know. There is. But Chris, this is called, this is called love. This is something else. Well, yeah. Love is not in the mind, but love should be intuitive. Yeah. But it's an example. Yeah. Do you believe, do you believe in? So if I'm your colleague, so I work now for you. I'm a junior analyst. I come to you and I say, "Hey, Chris, I got this intuition. I think this looks really good." Will you believe me? No, I'll, uh, the, the, because the thing you said, people have to, we don't work like. Here's the difference is, I've been a stock picker. So a lot of portfolio managers aren't portfolio managers, they're managers of managers. Oh. And they say people like that say to me, there's only two truths, which is not the story that I hear, but the P&L and the stop-loss. Yeah. Because they can't analyze the company themselves. M. So, no, we never take anything from anybody at face value. And we, we work in a team. That's something we didn't mention earlier, but the, um, the point is, just a story is just a story. Yeah. What you have to focus on what matters. Okay. Because there was a, a spiritual teacher, actually, said something that applies to investing. He said, "Very few things matter, and most things that matter don't matter at all." Okay. So, you can, and investing, it's actually similar. Yeah. You can, you need to get out of the noise and just focus on the handful of things that matter.
Is it, is it talent or can it be trained to become a good investor? I think it can be trained. Yeah. There's a judgment element of it. I think it can be trained, um, for, for sure. No, we have, we both have taken inspiration from some of the same people, right? One of them is John, who I worked with. Yes. I love John. I love John. He's, I consider him a friend. Yeah. When I was just starting out, he, he really, uh, he's a great investor, and he took me under his wing a little bit. And, uh, 'cause I didn't know anything. And, uh, we, we had the same couple of, same stocks. The energy group was one. And I, I, I, I, I didn't have the experience to know. And say, you would probably say, you know, that knowing and intuition comes with experience. To, to, but, yeah, and, uh, so, yeah, I'm, I'm a fan of John's. Yeah. Because most of the things I know about investments, I learned from him and his partner, Bill Bollinger. So we have some of the, we have some of the same teachers here.
Uh, moving on a bit. Uh, so you are, or you were, you know, perhaps more considered an activist investor. Yes. So what, in your, in your view, what is an activist investor doing? It's, it's a spectrum, uh, and from full-blown hardcore removing boards and CEOs and, uh, and, uh, demanding the sale of a company to, um, uh, call it, uh, soft activism, softer activism, of trying to have a relationship and dialogue with the company at a professional level, a, a, and where you understand their, their mindset and their thinking of the business. So, so, and, um, uh, and engage. Okay. And that could mean many things. It doesn't, uh, you know, uh, I'd say today our relationships are very, generally very constructive with companies. So, but it wasn't always that way. Yeah, it wasn't. We, I, I learned, you've gone kind of from having been an aggressive tiger to becoming a bit more of a, yeah, you know, big, uh, lion. Yeah. Though no one thought like that when we started the fund. And when we named it the Children's Investment Fund, we thought, how are we going to compete with Tiger and Viking and more aggressive named funds? But, yeah, it is true. I've learned that actually activism, hardcore activism, is not a, a great thing. Uh, why not? Yeah, it's very difficult to succeed because the vast proponents of today's investor base are, you know, passive, who don't actually, uh, to get them to vote for something is very difficult. And, uh, um, and all the power, you know, the, and, and so active management is dying. And so when I started, there was very little indexation. And so there was a more engaged active share base. And now indexation has, um, limited the power of, of shareholders. But I mean, you were one of the most feared people in Europe. Yeah. But I was buying bad businesses, uh, long ago, like ABN AMRO, putting up for sale, uh, through putting on the AGM of Oats to sell the company. And we made a lot of money. Who made a billion dollars forcing the sale of it. But in truth, the company was worthless, but was bought for a hundred billion from three companies who all went bankrupt. Royal Bank of Scotland, Fortis, and Onventis. So, they didn't know what we, they were doing. We didn't know what we were doing. And it was all, um, uh, you know, a madness. It was a, but it, it made money. But for those who sold, but in truth, the fundamentals were, were, would trump everything. So a lot of activists end up being activists in, in, in bad businesses. Yeah. But are you, have you stopped being an activist because you are more attracted to good companies or because you can't take control? The business always wins. Yeah. Okay. So it's pointless being an activist in a, in a B, B, B business. And, that said, uh, we, we, we still engage in it in, in hardcore activism. We, we're an investment where we, we went on the board and, you know, pushed out, you know, chairman and some directors and, and, and, uh, the, and, and the company's doing much better now. And, um, but that's an exception. And, I'd say that was as a result of, of a disastrous case in the company where they, we weren't on the board, and they, they couldn't appoint a CEO. The board was divided, and it, it was a real mess.
What kind of personal toll does it take on you to be in these fights? Yeah. Let me give you an example. A few years ago, we, I don't know, it was six years or, or so, we own shares in Safran, uh, where we still own them. We've held them for 13 years. And, um, it's a great company, aircraft engines, and, uh, joint venture with GE Aerospace. And they announced they were buying a company called Zodiac. And we thought, French aerospace company, we thought the price was ridiculous, 10 billion euros. And they wanted to pay in shares, and we thought that we, we believe the shares were half price. So they were paying four or five times the, the intrinsic value. And we undertook a very aggressive campaign, and, um, threatened litigation, and demanded a vote. And in the, in the end, the company, the target was adding multiple profit warnings, and it became clear that we were right. And Safran went to Zodiac and said, we have to cut the price in half and pay in cash because TCI are forcing us. Okay. And so, and that's what happened. The stocks doubled. And, um, a, and, but we were sued by the seller for a hundred million euros, both me and my general counsel separately. He said, Chris, I'm not really sleeping much at night. Well, you can afford it. I, I, I can't. And, so, yeah, I went into a Paris court, and you, it's not for the faint-hearted to do this.
And do you enjoy a good argument? No, I don't really enjoy fighting people anymore. I never really did. It was, it was a, it was a, something we began with Deutsche Börse, and, and now really, I'd say what people call activism is a, is really an exception to us. So it's like, why did we get involved in that Zodiac? We were already a shareholder, and something bad came out of the blue. It's like you walk home and someone attacks you. Yeah. To try to take your, your wallet, and you fight back. And I say, "Do you enjoy a fight, Nikolai?" No, but I'm not so sure I would fight back. Should you choose to, I would ask you that question. Is you, you would say, "No, I don't enjoy fighting. It's just I had no choice. I was fighting for my life." Yeah. So, I put it like this. We act as owners. We always act as owners. What does that mean? We, we, we're interested. We're engaged. We think we have a right to, um, appoint directors. We're a legal right to it. And, and we'll, Yeah. And so we teach, one thing we have learned is governance does matter.
Which brings us to kind of the opposite wild card. Mhm. It's a bad company which you shorted. And shorting, uh, just for those people who don't know, it's, uh, you borrow shares, you sell it, the goal is that the share price should go down, and you buy them back cheaper and hand them back, right, and make a profit. So what's the, what was I mean, in a few words, wild card? What? There is a very long and complicated, high-level. We learned that shorting isn't a great business because you can be right, but not be able to hold it or fund the losses. Okay. So, um, but Wirecard was because if you are short and the share price goes up, you basically have unlimited downside. Yeah. And you have to fund the losses. This is what people don't realize. You're going to be eventually right. So, the first guy to short Wirecard 20 years ago was a guy from Bronte Capital. And the stock went up 20, 30 times and went to zero. But he was, when that happened, he was interviewed by the media, and they said, "Congratulations, you, you were right." But he said, "No, I had to, COVID-19 years ago, I couldn't afford to, to, to fund those losses." And so it's, you have to understand investor psychology. Yeah. It's tough. Very tough. And, uh, I had a dinner once with Warren Buffett, and he said he and Charlie looked at shorting. Yeah. They studied it, and they just said it was too hard because of that point of understanding investor psychology and the, um, asymmetric risk and reward, and, and, um, so it's an exceptional thing. But, uh, we, we, we looked at Wirecard and, uh, and all the accounting games, and, and then the Financial Times came out with all these articles. Yeah. And I called the journalist, uh, good guy.
And I said, "You're writing all this stuff." And, uh, he said, "It's all true." I said, "No one will listen to you." He said, "Everything's true. We stand by every word." And and and you just you could literally read it in the paper. And well, the whole German establishment went in and supported the company. That's right. That's right.
In fact, the the the the chairman was a former CFO of Deutsche Bulser and uh um in in but there was a bit of pattern recognition where I remember uh at Harvard Business School an accounting course I took and there were red flags. Yeah. When you do this small auditor. Yeah. Um uh no cash flow. Yeah. Um and uh things like all their Asian businesses the office was empty. Yeah. Absolutely.
So but I think to be a good investor you need a certain independence of thought. Totally. And probably to be a good journalist as well. And and that's why um the funny thing is that the fraud was there in plain sight. And I think um I learned to be an independent investor and uh the and so we went to see the CEO. Actually, I sent two of my team to meet him and uh and they came back incredulous at this like pathetic demonstrations of technology and uh that they were shown. And interestingly there there was a a potential catalyst which was the the the report about their accounting and uh in the end they just said it's it's garbage and uh and then the stock went up a lot and uh so actually I tried to take um uh become an activist in this position. and I filed a a a a formal criminal complaint for fraud in in in the uh at the Munich prosecutor's office because uh they said if I didn't wasn't public about it would be viewed as market manipulation. So we're transparent about it and um that created chaos but it forced some actions. Yeah. you you you know when it falls eventually an investigation and uh and so um because I didn't want to be like Bronty Capital where it just ran and ran and so at some point it really became obvious and it became a confidence game. I think that um people trust authority too much. Okay, that sounds a strange thing, but they trusted the German establishment. Yeah. That you had a a board with the the great and the good and and and they weren't willing to believe the the journalist. So, but but I'm I'm really we had a we had a we had a very good team at uh at MBIM, you know, which was on the same who who were on the same side of that.
So, so really good talking about trusting authority and so on. And moving on to corporate culture at TCI. What is a corporate culture like in TCI? How many people are you? You know in the investment team it it's it's it's you know seven eight people. We have a large back office but um how do you work together? The we want small very small and uh it's collegiate. Yeah. We've known each other a long time and there's something that we've built which is an intangible trust.
Why don't you have a hundred fund managers? Good question. Firstly, my best people, you know, they would never stay. They just they don't want to um it would be too impersonal. There's a human aspect to work. Yeah. People don't come to work, you know, the best people for money. they come to because they they enjoy the environment. And so it's really important how we treat people, how everyone treats each other. And I'll never hire someone without the the the the blessing of my my my senior team. Um and because we we could destroy the the culture. And so I mean ice hockey teams are five and football teams are 11. And is there something magic with seven? No, but it's small enough. Yeah, it would above 10 it would be too too big.
What do you look for when you hire? So now I'm I'm applying for a job. Everybody you meet everybody. I'm applying for a job at TCI. I'm here. You share the philosophy. You share the philosophy. What kind of questions you ask me? Yeah. What makes a good business? All the things you talked about it. It becomes Yeah. We we we ask for a case study, right, or two. And it becomes immediately obvious whether you know what you're doing. Yeah. Whether you share the philosophy, but also it's not enough just to be a good investor or you have to want to work in a team. Yeah. Not everybody wants that. And you have to be able to get on with with people in in a way where you have to be open-minded to being wrong. You can't be too dog dogmatic because um so the personality does matter a lot.
Now uh you have a big share of the profit of the firm goes to the charitable foundation right? Yes. How well actually I I give it to charities. A lot of philanthropy I do directly often I give it to the foundation um uh or co-invest with them. So yeah one way or another it goes to charity. Do you think it's important for your colleagues that you guys fund all this well charitable? No, I think they make a lot of money too. Or do you think it's irritating that you give away all the money? They they they also earn uh you know good money and uh it's probably a positive thing. I I I I don't know definitively. I um and um the um and um the but I can't you'd have to ask them. Uh I I can't say definitively. Um but I um I I I yeah I I give away everything I earn. I I don't really care about money for uh because other than its value in helping people.
When did when did you learn about philanthropy? Who taught you? When I was in New York working for a hedge fund uh one point after about three or four years it made I don't know two or three million. and they I had done well and they said, "You're going to get a $10 million bonus." And I just, this is in intuition, said, "I don't want it. I I want to just give it to charity." And I created a a US foundation and gave it to it. Um, and I didn't really understand it what was driving me for 50 years. I would uh meet with Bill Gates, did a lot of charitable work with him over the years and he would ask me and I I couldn't answer the question and uh eventually I did understand it and uh better late than never as a as a soul urge that there's essence who we really are what we really are isn't the personality or the physical body but you know soul or consciousness and and that um some would call it life. Yep. That's something that gives us life and uh that um and will. Yep. Gave you, you know, in in the same way you uh Nikolai had a a desire, a will, a will to do something more with your life. Yeah. Than than than than just make money. And uh and that uh and that in the fundamental nature of that uh that that uh uh that's uh the soul is is service desire to help to to to help ultimately humanity and u where did that come from? It's innate within everyone that but the Yeah. Yeah. For sure. Everyone So if it's inate with everyone why why don't more people do it? Because they're um they identify with their personality a and less with the consider that like a unit as a user interface of the soul and uh and the personality's basic uh urge is desire, possessions, glamour like power and money and other things like that. And um and uh sooner or later people realize that that doesn't really um give you know um some would say happiness but actually there's more important things in the world in life than happiness. uh purpose and meaning but not but you say that sooner or later people but I mean people don't I'm not saying in in in one life they may need you know many lives and that may be a strange thing for you to hear to uh to realize yeah I don't believe this is the only time we we we we we're um we here and um eventually we'll learn that the the um what we are and can be as a result of some crisis in your life. Yeah. And death, disease or or or um or in my case the third D, divorce. And uh the um and it's then that they look inward and and and and ask well what is their life about? What is there a purpose? Is there a meaning? And for me, I could never find any purpose or meaning in my life except service. And uh and that is clearly uh you know something you could say it comes from within. Yep. And uh and so that's my origins of my my philanthropy.
Do do you think uh I mean you came from a working-class family, right? And your father was an immigrant. Do you how do you think that shaped you? It made me an independent thinker. You always grew up as an outsider and um and uh you you felt different and um and uh it gave me a work ethic, a work ethic um and uh and uh a desire to to achieve something. Yeah. And uh so I think that that was an important uh piece of my history. Yeah.
Tell me about the foundation. What are the main priorities of the foundation? Now first you said so it is now one of the largest foundations in the world. Right. We have uh about $6.5 billion dollars and uh in the foundation and uh I also do philanthropy outside of that and so between us we're giving away over $500 million a year. two main areas, climate change and uh children's health in Africa and India. On the um health side, we focus on foundational issues. Um uh contraception is one. You know, we can't get development or lifting people out of poverty if the the women are having which far more children than they want. you know in Africa fertility is nearly seven and in many cases that's not applicable they they don't have access um a and agency women don't have access or agency to to contraception and so for $10 cost for a voided uh a pregnancy you can help a poor woman have one less pregnancy if she wants. Yep. And that's a remarkably low return on invest high return on investment. Yeah. There's almost nothing. Um another area is um severe acute malnutrition. Um where um I I funded the creation of a a company and I and I buy product for um um for $40 a case you can of therapeutic food. Think of it as a fortified uh uh power uh bar or it's it's uh you can save a child's life and there's 100 million children with severe or acute malnutrition nearly half of all child deaths under under five. Um neglected tropical diseases like traoma. I fund traoma surgeries where just a it's not for $50 you can um do fund a surgery which stops someone going blind irreversibly. Yeah. And there's you know millions of people with with this. So with so little money Yeah. $10, $40, $50, you you can save a life. Yeah. Or or or or stop something going blind. It it's remarkably you know you know what what you know when you go to go out for dinner you might pay $40 for a bottle of wine you wouldn't think oh I could save someone's life with this but that's the reality and so um the um um HIV AIDS um we're very involved in as Well, uh so um uh and on the climate side, what are the main areas that we've been trying to create infrastructure for the climate movement um and uh uh regulation advocacy because nothing's going to be fixed if there isn't regulation. um we fund um uh then that's across the board and that's and also technical assistance to governments who want to change but don't know how we're very active in Asia where where if you don't operate in in in India and China you that's where and and and and you know Vietnam and all these countries that's where all the emissions are growing tax is another thing because if if we're not advantaging through tax uh new technologies and and and we're subsidizing fossil fuels, which is what happens. We'll never change. Um um a and uh methane is another one. We're a fun of the methane hub and methane satellites and just many things uh litigation, environmental litigation. We fund that. So, in a sense, there's activism there.
And um so given all this, how do you read the backlash against ESG in financial markets? Well, I never really got involved in in in the S and the G. I just the E. And so here I I I think is a very dark uh um thing that's going on where people are saying some people are saying in in effect burn down the planet as long as we can make money today and uh we don't care about future generations. We don't care about poor people in poor countries dying off. We only care about our country. Yep. And and making money as much money as we can today to hell with the consequences. And it's really back to what I was talking about this distinction between soul and personality that if um it's a consciousness problem and uh and actually we'll never solve any of these problems whether it's climate or poverty or war if there isn't a change in the level of consciousness.
So given that and in order to finish off on a slightly more uplifting note um What is your what is your advice to young people on a kind of spiritual Yeah. Go on a spiritual um path. Go on a study a and I would say the spiritual world is real. soul is uh when I first mentioned this to my son I think he was uh 20 he said dad the soul is a myth he doesn't think that now is it not he doesn't think that now it's definitely not and there are many paths to connect to it and uh you can connect consciously to it and um and uh whether you go the long way the short way the easy way the the hard way through suffering you eventually come to to learn that it the spiritual world is not just real but it's the the whole thing and and so the um and that's the only source of real purpose and meaning and and and and joy which the world needs. Yep. And and and I think that uh um if you crack that then everything else is easy. Very good. Uh Chris Horn, we've talked a lot about purpose, meaning joy and what really matters in life. A big thank you. Thank you. And Nick, thank you.