GQG - Rajiv Jain interview with Meb Faber, on the Rip Van Winkle portfolio - fantastic businesses?

Apologies, I had to put this excerpt in too, last one I promise. This reminded of one ASX listed fund manager that has fantastic businesses and holds for long periods of time.

Rajiv: Sometimes I’m a little bit envious of folks who say, “Look, we believe these are fantastic businesses and they’ll be around forever and happily ever after.” Because I feel that, you know, it’s kind of almost like a Rip Van Winkle portfolio, you’re happy until you disappear. And I think the more… is maybe living a little more in an uncomfortable zone. Because my view is that if you’re not sure how deep the valley is, whether it’s 10 feet, 1,000 feet, just back off.

And if you go back to 2019 and ’20, we actually were becoming fairly constructive on corporate earnings growth. And again, it’s much more data-dependent. You know, the better opportunity was, for example, some of the European banks. For the first time, I bought an airline last quarter of 2019. Talk about perfect timing. So, of all the years, I buy an airline in the last quarter of 2019. Because nobody would have timed that better, by the way. As January evolved, I mean, one of the analysts said, “Look, this…why is this … hitting in China? You may want to pay attention to that.” This is early the first week of January or something. And obviously, having lived through the SARS, I said, “Maybe, if nothing else, let’s start cutting back.” So, we started cutting back the airlines in January and February, thereabouts. And then February came along and we started looking…

And by the way, we have also a team whose job is nothing else but criticize everything we do. Their compensation is structured around that.

Meb: Oh, man. That’s awesome. Spend a little time on that real quick. Not to interrupt you, but that’s such a cool idea. Tell us a little more.

Rajiv: Yeah, I think because, as you said, the incentive is always to high-five each other and agree. In fact, I’ve read people who basically would eliminate anybody who disagrees with you because, “Oh, this is our style. This is A, B, C. You have to walk exactly the same dotted line.” Which I personally find a little bit crazy because then there’s no disagreement. I mean you all behave like lemmings and you’ll jump out of the window somewhere down the line because there’s nobody to disagree.

So, for that I think it’s better to just structure the team differently. One who’s incentivized and compensated to disagree with you. So, in other words, their bonus is dependent on if they like something, they basically own the name, too. By default, they disagree with you. And unless you share in the compensation, it won’t work. Because, I mean, whose bread I eat his the song I sing. They’re not…nobody is going to disagree with you if they know that, “Yeah, yeah, ask them to disagree, we’re not devil’s advocates,” but really what you want is you already made a decision to buy, on an ongoing basis.

So that is part of… And if you want to make sure that’s documented, which we document, by the way, the disagreements. And I think that has been instrumental in forming the culture, where disagreements are actually appreciated and documented just to make sure what the disagreements are.

So, every name… And when our client meetings, by the way, say, “Would you like this name?,” I say, “I like it, but this so-and-so person on the team hates,” you should talk to both. Because on balance, all we’re trying to do is get the odds in your favor. In other words, if the odds are, let’s say, to make a, hypothetical number, 60% positive, 40% negative, that’s all you need. In fact, once you get to 80%, 90% conviction, you, in my opinion, you’re no longer objective. So, if it will work, it will work ridiculously well. Like the fans over the last decade, the true believers did very well. The question is, “Will they be able to get off the train when there’s time to get off the train?” People like me always are sort of doubting Jacks and never have the same upside because you’re always sort of checking, cross-checking, questioning, cutting back on data points. So that’s why I thought it was important.

By the way, that is part of the restructuring I thought about doing when setting up the GQG, that it has to be done. It’s hard to change with existing people, by the way. You almost have to gut the team. Which is why I didn’t want to bring anyone from the prior team, because cultures are hard to change. So that is part and parcel, it’s embedded in how we think. There’s a lot of self-criticism that happens and is documented.

This is an excerpt of an interview conducted between Meb Faber and Rajiv Jain located here:https://mebfaber.com/2021/06/16/e321-rajiv-jain/

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