GQG - Rajiv Jain interview with Meb Faber, skin in the game and investing approach for higher returns (IMO)

Here is the third excerpt from the interview:

Meb: You mention a couple things in there. The first being it sounds so obvious, the skin in the game part. And I mirror what you were talking about and invest almost exclusively in our funds and strategies. But the average mutual fund manager has zero invested in their own funds. And that always surprises people, they’re like, “What do you mean you can’t?” And if you look at it as less than $100,000, it’s an even higher number. And to me that’s crazy, but whatever. That seems like an obvious conclusion because, as we know, incentives drive everything in our world.

And particularly…and I was talking about this last year, the last conference I went to pre-pandemic, or kind of during pandemic, was talking about this concept of, “Look, if you’re an active manager, the base case, like, the ‘Investing for Dummies,’ that world is a commodity, it’s free now.” And you mention a couple basis points. If you include short lending, it’s probably not only already free, but actually paying you to own a portfolio. That’s amazing, but also has a lot of implications. It means to pay someone to do more, like, they better be adding some sort of value. In the world we live in, which historically is just the closet indexing world, that is a rarity.

Okay, so the structure was important to kind of get right, as you mention. And what about the investment philosophy? How do you guys think about actually building portfolios, putting money to work, what kind of portfolios do you guys manage? All that good stuff.

Rajiv: So, the other thing was structuring the team. So, a vast majority of people have said, “Oh, gee, this is the same team I’ve worked on all my life.” And I’ve actually, based on my experience and mistakes, basically learning from mistakes, I said, “Okay, if this didn’t work, let’s try to change that.” So, I didn’t bring anybody from our prior team. And it’s like, “What can we do different?”

So, one of the things to try to do different was let’s make sure that people come from very diverse backgrounds. So, the folks, for example, who have long-short equities, long-short credit, value shops, growth shops, private equity, journalists, forensic accountant. So, it’s an extremely diverse group of thinkers. So that’s the first sort of part of the whole process.

And then the question is, what I would say, is kind of mom and apple pie. Quality business, sensible prices. Taking a long-term view. However, willing to adapt as the data points change.

So, while it’s easy to say our edge is long-time horizon, I think it’s a little bit too simplistic, in my opinion, to think that way. Yes, there are a lot more shorter-term …investors. However…it’s hard to take long-term only. And the fact is if you take a very long-term view… Well, Japanese corporates take a very long view, and that hasn’t turned out to be any better. So, the question is, “What point do you adapt and recognize your mistake?”

So, focus on the quality of business first, but eliminating the weaker companies. I think the biggest point of investing is, as Charley Ellis said, it’s a loser’s game. So, you got to cut the tail first. If you’re fishing in a better pond, you improve your odds. And I think it’s all about improving your odds.

So first, improve odds by cutting off weaker businesses relative to the industry or whatever. So I’ve owned commodities, financials, always the technology, software, so on and so forth.

So, everything should be investable. Because one of the notions that quality doesn’t include cyclicals I find a little bit strange. Consistency of earnings is not always the hallmark of quality, because that could be a function of the environment that you were in. As you know, a lot of…you mention CMGI and JDSUs of this world. People thought they were quality, and they no longer were quality as the tech downturn started in the 2000s. And I wouldn’t be surprised if it kind of happens again this time around.

So, cyclicals should be very investable, the question is the barriers to entry. So, get the barriers to entry right to the extent you can, and then see if you have a sense of where the business might be heading three, four years out.

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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