A rare, wide-ranging podcast interview with Kerr Neilson, founder of Platinum Asset Management. He discusses his early life experiences, career and investment philosophy. Some brief notes below just for personal reference (not a transcript, and any mistakes are my own).
On what drives him – the first thing is insecurity, which he doesn’t regard as an admission of a great weakness, just an acknowledgement that many of us have different motivations. The second is getting better at things. In the game of investing, if you are open to criticism and new ideas, you will progressively get better. Money was never the great driver.
On things he was still learning at the later stages of his career – the trouble is you have all these terrible habits. They were always trying to find neglected ideas, so if something has run up 30%, you can hardly claim it’s neglected now. But sometimes it is such a good idea that you should be prepared to move your price targets. Another learning was around patterns of behavior. When he was shorting in the early days, he shorted effectively, but later it took on a tag of trying to protect rather than to make money. So he had to try and mediate that.
On the philosophy of continuous improvement – as they would go and visit companies, he was always comparing what they were doing with his own firm. Were they thinking about the future enough, investing in their version of R&D enough, modifying their behavior etc. There was always something to learn from the behavior of others, especially when you understood that they were running very complex businesses and he was running a relatively simple one.
On the universal element of success for companies and investors – focus. What is it that you are trying to achieve? And then it is all the mechanisms around it. But you need a very clear point of reference, which is where are we trying to get ourselves. In their case, it was to make money for their clients. And if their clients made money, they could not fail to make money for themselves. Some investment businesses are started up with the total intent of making money for themselves. The failure of that philosophy is you lose the plot; you are just the agent, you are not the provider of the capital, only the manipulator of that capital.
On hiring people – the markets are full of surprises. He likes people who are creative and imaginative because they will generally work their way out of a sticky situation, and we all face these at some stage. Having people with grit is also important, it is so easy to blame others and find reasons why you haven’t succeeded yourself. If someone has been subjected to adversity from an earlier age, they tend to have learnt something from that. No one filter for selecting people, and he doesn’t think was particularly good at it, but he was lucky.
On his childhood – he was terrifically lucky. His family had this long heritage of industrialists, and then his father’s business when bust. There is nothing more alerting to one’s consciousness then having been very comfortable and then suddenly being quite strapped. His father was a man of great honor so he felt he should pay his outstanding his debts, which meant they went through a pretty tough time. What that did was remind him that you don’t have any entitlement to anything. Later, in his teenage years, he was always perfectly comfortable in his own skin. He thinks that is just one’s own personality type. Some of us seek approbation or adulation. He wasn’t really so interested in that.
On his early investing experiences – to him it seemed common sensical and logical, but he didn’t have any advantage over the field. What he gradually understood is that you had to develop some sort of advantage. That was completely absent early on, so it was entirely good luck. Investors are facing a nightmare now. We are at a point of resolve in terms of changes in the markets. If investors don’t examine very carefully and apportion that which was luck and that which was clever in some value-added way, they are going to take some big bets and many of those will fail.
On developing an edge – getting there was luck. He had a very good foundation in London, then went back to South Africa and started broking to this one fellow called Allan Gray (Orbis). He was doing very strange things, buying companies that looked ludicrous and so on, and yet he was making a lot of money. So he backward engineered what he was doing, which was arbitraging the gap between what seemed seemed sensible and what was sensible, by removing emotion. So that is the great lesson he learnt there. Gradually developed this idea that what is obvious will be in the price and what you have to do as an investor is find out what is plausible but less obvious. Anyone can be lucky, but it’s your ability to persistently have a tendency to have more winners than losers, that is when you know you on to something. You want to have about 6 out of 10 but perversely you can have a score below 5 and still do better than average. By correctly weighting your winners, you can have an outcome that is very profitable even if you have a scorecard of less than 1 in 2.
On avoiding the crowd – what is lost in stock markets is there is the idea and then there is the price. The problem most investors have is they don’t segregate the two. They loosely use the term what something is worth and associate worth with the current price. Sometimes these coincide, but most of the time they are very different. From time to time, fashion takes over, and the price tends to be greater than the real worth. You just have to move away because most of the time this overextends. But you also have to be inherently conscious that we are all driven by fashion. If you work that out, you will realize there is another side of the story. The risk is, because of allocation of time, you spend too little on the fashionable so when it has a message to give you are not receptive to it. The greatest strength of investors such as Soros and Druckenmiller is they have no path dependency, which is where your actions earlier determine what you do today. They are able to sever that link and say that was yesterday, today I’m seeing the world this way. Most of us have a consistency requirement. They feel no need to show any consistency.
On why he wanted to set up his own firm – felt if had continued along his path at the time, he was going to die working for someone else and not have the final decision. Didn’t think they were going to set up something that was particularly large, all they wanted to do was manage money and then it took a life of its own. Would he have done anything differently? No, because the organization grows around you. The reality is it is DNA coded to your personality style. The one negative is that you are so busy day to day that you don’t stand back and ask should we manage this in a different way. You are running just to keep in the game. But that is the biggest test one faces running any business.
On his advice to analysts – simplicity is the key. Start with the reasons you think the market has got the story wrong and then elaborate backwards from there. Don’t laboriously take everyone through a vortex of confusion because you lose your listener. If you don’t cut to the essence, it just becomes tedium. So start with the answer. But be prepared to understand that you are trying to persuade and you have no right to stick that view, you may have done a lot of work but there is always another point of view around some of the interpretation.
His final advice to investors – the most important thing is questioning why is the crowd so convinced this is right. With all these great bull markets, there is always a kernel of truth that is elaborated and built upon but often becomes a massive sandcastle. Be aware of fashion, be comfortable in yourself to challenge that. And practice. If you are an amateur investor, keep a spreadsheet of your ideas (“I like this idea because X, Y, Z”). Investors need to have in their assessment a terminal valuation, a figure in their mind of what a business is really worth. Then watch it, don’t be impatient, and when it reaches a price that is giving you enough room for error, you can act.