How To Build Resilient Wealth W Matthew Mclennan

TITLE: How to Build Resilient Wealth w/ Matthew McLennan (RWH067) CHANNEL: We Study Billionaires DATE: 2026-04-11 ---TRANSCRIPT--- (00:00) You will have draw downs. There will be stakes of the world where you you suffer loss. But if the underlying businesses have staying power and the arithmetic of the investments makes sense and you have some balance that you can deploy in those weak moments, you’re going to be okay long term. Before we dive into the video, if you’ve been enjoying the show, be sure to click the subscribe button below so you never miss an episode.

(00:29) It’s a free and easy way to support us and we’d really appreciate it. Thank you so much. Hi folks, I’m thrilled to welcome back a very special guest on today’s episode of the podcast, Matthew McClennon, who’s here to explore an extremely timely and important subject. Namely, how can investors navigate this acutely uncertain time and build resilient wealth for many years to come? Matt oversees a vast amount of money, about $130 billion, as head of the global value team at First Eagle Investments.

(00:58) He’s also a portfolio manager of First Eagle’s global value, global equity, international value, international equity, and US value strategies. He joined First Eagle back in 2008 after 14 years at Goldman Sachs, and he was handpicked by investing legendary Jean-Marie Eveillard to become his successor at First Eagle. Matt was a very central character in my book Richer Wiser Happier where I profiled him and Jean Marie in a chapter titled The Resilient Investor.

(01:28) In my book I described Matt as one of the world’s most influential investors and one of the most thoughtful. I’ve been a senior adviser to the global value team at First Eagle since 2021 and I’ve been hugely fortunate to spend a great deal of time speaking with Matt over the last 5 years.

(01:48) Along the way, he’s become a good friend, and I’ve come to regard him not only as one of the smartest people in the investment world, but also one of the nicest. In this conversation, we talk in some depth about how to invest intelligently in perilous times. But there’s a slight catch. The first part of our discussion is missing from this video recording due to a technical glitch that was entirely my fault.

(02:11) If you’d like to hear those first few minutes of our discussion, you can listen to the full audio recording of this podcast by looking up the Richer Wiser Happier podcast on Spotify or Apple Podcasts where it airs on the feed of the We Study Billionaires podcast. If you prefer to keep watching this video, let me fill you in very quickly on what you need to know.

(02:32) In many ways, the war in Iran is a perfect illustration of Matt McClennon’s fundamental belief that financial markets are inherently uncertain, that they’re part of a complex, nonlinear system that’s wildly unpredictable. But Matt points out that there’s also an added layer of complexity and danger here. The war broke out at a time when financial markets already reflected a strikingly low risk perception among investors with credit spreads below average, earnings multiples above average, and fiscal deficits also larger than average.

(03:05) Given this backdrop of geopolitical uncertainty and economic uncertainty at a time of relative complacency in the markets. What should a prudent investor do? That’s the overarching subject of the conversation you’re about to hear. As Matt sees it, the solution is not to make big bold bets about a future that’s too uncertain and complicated to predict.

(03:29) And it’s not to behave with the short-term mindset of an aggressive stock trader. Instead, we need to start by acknowledging that the range of possible outcomes here is extremely broad, and we need to position ourselves to be financially resilient in the face of multiple possible scenarios. But how? Well, Matt’s solution is to approach the challenge of constructing an investment portfolio with the mindset of a patient and highly selective gardener.

(03:57) That’s to say, he wants to curate a portfolio with enough variety that it should continue to flourish under all sorts of conditions and should be able to endure the many shocks and unexpected hazards that can occur, including wars, pandemics, recession, inflation, stagflation, market crashes, and economic crisis.

(04:20) As you’ll hear, he uses the word variegation to describe this type of richly varied, ultra resilient ecosystem that’s designed to survive and thrive over the long term.

(04:44) And it’s more in line with the notion of being a business gardener, which is that if you think of a garden, what makes a garden beautiful is its nonuniformity in a sense that it has different trees, different pockets, different experiences. And not only does that make it beautiful, but it makes the system resilient.

(05:01) And so when we think of variegation, we think about it this way. There’s a certain thread of continuity that links all of our stock investments. And that is that we like scarcity of market position. Whether it’s the assets a company owns or whether it’s their market share position or their capability in a certain arena.

(05:17) Scarcity in either a real or an intangible asset. But what’s important to us when we put a portfolio together is this notion of variation that we want intentional nonformity. We want different industry exposures. We want different country exposures. And when you look at our portfolio, we tend to be quite diffuse in our exposures, but not in a way that just mimics the market.

(05:40) So the market while diversified statistically is over 70% in the US, whereas we’re not going to take that much risk on a single country. The market is very concentrated in tech stocks, some of which we like, but we’re not going to take that much risk on one sector. The market doesn’t necessarily have a defensive ballast element to it like gold, which we intentionally do, but we maintain a limit on the size of that investment so that it doesn’t dominate our returns.

(06:07) And so variation to us is part of the curation process, part of selectivity. It’s intentionally bringing non-uniformity to a portfolio, but in a way that’s distinct from just naive diversification.

(06:30) So we’re not a mag seven portfolio or we’re not just a long Europe portfolio. We in acknowledging uncertainty want to have many sources of scarcity value in the portfolio so that they can come to fruition at different times in different seasons.

(06:56) And so just to go back a little bit, it feels like the first thing in terms of mindset is simply the recognition that things are truly unpredictable and that if that’s the case, safety and survival become a priority.

(07:20) I was very struck. I was looking back at something you once said to me where you said you want to be structured to participate in the march of mankind but survive the dips along the way. And then I was thinking the other day I look back at an old email that I had sent you that was a wonderful quote from Peter Bernstein from an interview that my friend Jason Zweig did with him back in 2004.

(07:40) And Bernstein said, “Survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn.” And then he said, “Diversification is an explicit recognition of ignorance.” And I view diversification not only as a survival strategy, but as an aggressive strategy because the next windfall might come from a surprising place.

(08:07) I want to make sure I’m exposed to it. I always like to come back to Seneca’s quote where Seneca said, “If a man knows not to which port he sails, no wind is favorable.”

(08:26) And so I think it really pays to know the destination in advance of setting out on the journey. Knowing that the goal is to participate in the march of humankind, but to survive crisis along the way is a good sort of guiding light. It tells you rather like the sailor in Seneca’s boat that you need to travel a journey with some ballast.

(08:46) And so that is why even though we’re primarily business buyers, typically we might have 20-25% or 15% of the portfolio in a combination of cash for short-term deferred purchasing power and gold as long-term purchasing power. So that’s almost analogous to the ballast when you set out on a sailing journey knowing that you’re going to encounter unexpected storms from time to time and knowing what your destination is.

(09:12) And then I think it also informs us about the kinds of businesses that we want to be owners of. We like there to be some scarcity in the nature of the assets a company controls because if you control a real asset that’s well positioned, well located and advantaged, it’ll either garner premium rents or premium margins relative to an industry and so you might go through business cycles but you’re likely to survive.

(09:37) The second thing is, if it’s not a business that involves real assets, if you have high market share position, it’s going to give you scale economies in whatever matters for the unit economics of that business, whether it’s R&D, whether it’s advertising, sales density, or whether it’s the network of distribution that you have overall.

(09:56) And so market share advantage gives you lower fixed costs, better margins, but also an element of better pricing power. Again, acknowledging that you’re going to face stormy conditions. From time to time, these kinds of businesses help you make it to the other side. Also, businesses that have scarcity in either the assets they own or their market position tend to have the capacity to be predators when times get tough because they are going to survive and they’re likely still generating some cash flow that they can consolidate their market position countercyclically.

(10:27) And that’s an unusual position to be in. And even if you’re not investing in augmenting your market position, you have the option value of buying back stock when it’s depressed, if you have the strong capacity to generate free cash flow. So at First Eagle, aside from traveling the journey with ballast, this notion of scarcity in the position of a company is critical for us because it gives us that positive fundamental convexity.

(10:54) And the key element that has to go alongside those is a valuation margin of safety. If you acknowledge that the future is uncertain, when you buy into a company, don’t buy on the presumption that you can forecast decades of growth into the future, buy at a valuation where not a lot of growth is being priced at all, such that if growth occurs, you get the benefit of that largely for free.

(11:15) And this comes back to your comment about diversification or as we would refer to it variegation being a source of opportunity because if you haven’t paid for growth and you’ve got variegation in the portfolio, something’s actually going to do well perhaps unexpectedly and you’re going to capture the value of that if you haven’t paid a high price.

(11:32) And so it provides you with a sort of free source of optionality. Now, if I compare that to an alternative strategy, which I would refer to not as resilient wealth creation, but the attempt at extreme wealth creation, it’s often a very different approach that investors might take.

(11:48) They’re going to be more concentrated, often thematically very focused, and they’re going to tend to focus on situations where they perceive there’ll be a lot of option value beyond the apparent value today, either because they see a large addressable market that the market’s not pricing or they might be buying a deep cyclical that’s very cheap relative to the trailing peak level of its earnings.

(12:09) Now that is an alluring strategy to a number of people. They want to get wealthy quickly. The problem with that strategy is that it’s very difficult to execute with discipline. It’s very difficult to take people with you on that journey given the volatility that it entails. And most out of the money options tend to expire either worthless or less than the premium that you paid for them.

(12:29) And so one has to be careful when one looks at the track record of people who built a lot of wealth through extreme concentration and betting on out of the money optionality that there’s an element of survivorship bias in that. You’re looking at the people who have survived out of the many thousands of people who’ve tried it and have not.

(12:46) And so I think the point that you made about the power of diversification or as in our case variegation is a powerful one if the journey is to get there safely.

(13:04) And then I was chatting to him after the recent offsite after one of the investors there spoke and he was saying to me that I often focus in my interviews on people with very concentrated portfolios and he said you’re probably really falling into the trap of survivorship bias because you’re focusing on the handful of brilliant ones who also got lucky and survived.

(13:23) And he said to me a really fascinating thing that has stuck with me where he said that during World War II for example if you owned a diversified portfolio of companies that people can’t do without historically you’ve done well over time. I thought that was such an interesting observation.

(13:51) One of the things that’s interesting about having a great team is at the individual level on the team, they can feel that they’re allocating capital on a fairly concentrated way. But a source of an additional layer of variegation in our portfolio is that we have different individuals focused on different subsectors of the market. So they can get the benefits of specialization but at a portfolio level we’re assuring variegation.

(14:33) I recall reading in Buffett’s letter to shareholders in 2024 that he made an interesting comment that he said we’ll typically have more than half of our wealth invested in equities because businesses can adapt to monetary instability as long as they’re selling products that are demanded by the citizenry.

(14:58) And this is a really important insight that price equilibrium can be disrupted whether it’s an oil price shock or whether it’s fiscal issues or monetary issues over time but companies are adaptive entities and as long as their products are desired to use Warren Buffett’s terms by the citizenry they can reprice their business in the fullness of time.

(15:16) Now, it doesn’t mean you’ll be protected in the short term. You could have a few quarters of difficult earnings, but good businesses tend to adapt. And he said, by way of contrast, having higher yielding cash is no protection necessarily against the runaway currency. He identified that fiscal folly is usually the source of that.

(15:33) One of the phrases that you’ve used over the years that I don’t think I had sufficiently quizzed you about because it’s a really interesting idea is positional assets where you’ve talked about things like art and wine and prime real estate in places like Manhattan or even iconic brands as positional assets.

(16:01) Often things in light or real truth tends to be paradoxical in nature and I think one of the things that people are taught in business school is that the risk-free asset is a treasury bill or a short duration treasury security because the principle is guaranteed and the coupon is guaranteed.

(16:30) You could think of these as fixed principle assets. On the other hand, you have assets that may not actually yield any cash flow today. Think about a classic old master’s piece of art that is by a well-respected painter. It doesn’t have a cash flow attached to it. So, in traditional finance theory, it doesn’t have anything to discount. It doesn’t have a value.

(16:52) Gold or a vacant block of land are also positional assets that in traditional finance theory are kind of hard to think about from a valuation standpoint. But the interesting thing about these assets is that sometimes reality in the fullness of time can be quite different from what you would think about these assets in the near-term future.

(17:11) So a treasury has a fixed principle, but what it doesn’t have is fixed supply. The asset of the government is the ability to tax its citizens. And there’s probably a real level of taxation that’s optimal beyond which it starts to negatively impact the productivity of the economy.

(17:36) The government has a certain real ability to tax. If it starts running big deficits on a sustained basis, it’s essentially printing more fixed claims on that real asset. And John Cochrane the economist makes the point in his book The Fiscal Theory of the Price Level that it’s almost like a share split.

(17:54) Basically if you keep issuing debt against the same real asset the real value of that debt must go down. So the irony of fixed principle and fixed coupon assets is that while they may be risk-free in the short term they can be quite risky in the long term because they’re not fixed in supply. On the other hand, with a positional asset, it’s its fixity of supply that can make it a better store of real long-term value, even though it may be fluctuating in value in the short term and not offer a lot of cash flow in the short term.

(18:24) A vacant block of land in a great city or on a great beach is ultimately going to be cyclical, but it’s going to reflect the purchasing power of people who’d like to build a house on that land long term. So it’s going to participate in real income growth over time perhaps in a more secure way than a treasury where you don’t know the future supply growth of treasuries.

(18:45) The same can be said for gold. The total stock of gold above ground, a couple hundred thousand tons, could pretty much fit into a cube the size of center court at the US Open. It’s a fixed positional asset. And the amount of new gold being mined every year is only about 1.5% of that total. Central banks and private investors and people who desire jewelry are competing for that fixed positional asset. And so over time, even though it’s volatile in the short term, its value has accreted with the wealth of the people competing for it.

(19:28) And so it’s been a better store of value long term. And in some way, businesses are somewhere in between. A great business has a bit of both. It can generate cash flow today and if its market position is preserved for a long time, it can participate in the income growth of its customers over time and be a good store of value.

(19:47) So the best businesses combine free cash flow and preservation of purchasing power long term. But the tricky thing with businesses is that all businesses ultimately have some amount of fade risk. New businesses get created that eat into the profit pool. And so businesses are like productive assets, but they have long-term fade risk, sort of like a melting ice cube.

(20:09) And you want to try and identify those businesses which have a slow melt rate. And then hopefully you approach a positional asset.

(20:30) The problem being that the cumulative rate of growth in government debt has been much higher than 5%. And so while you’ve had a steady return, you’ve had an erosion of purchasing power. On the other hand, something like gold was volatile, but it’s kept pace with the growth in the stock of government debt. And so it’s been a better store of real value.

(20:48) So that’s what I think about when I think about fixed principal assets versus fixed positional assets. And I think one has to be open-minded to the possibility that an asset that doesn’t have cash flow today can have value today if people are going to compete for it as part of their nominal pool of wealth.

(21:19) I wonder if you could just give us a sense of what you realized early on about gold that some of your wisest and smartest peers didn’t view as so important, and also just the emotional difficulty of making this very large very contrarian investment that for years you kind of didn’t get rewarded for.

(21:45) I guess if I had to pin it down to one thing, first let me just give credit to my predecessor Jean-Marie Eveillard who had always invested some amount of the fund in gold and had recognized that in extremis gold has value as a potential hedge and it has a kind of real monetary value to it. Jean-Marie had often said gold is not a commodity, gold is money. And I think the criticism of gold from many luminaries has been that it’s inert, it’s useless.

(22:16) But I think the paradox of that is that the utility of gold as a potential hedge is its uselessness as a commodity because it’s chemically inert. It naturally lasts forever and because it’s not used primarily as a commodity, it has less sensitivity to the business cycle. So a commodity that doesn’t last forever, that rusts or rots or fades, is produced for use.

(22:40) Whether you’re talking about oil or copper or iron ore, it’s going to have volatility that tracks the business cycle. The inertness of gold gives it a naturally lower sensitivity to the business cycle and a naturally longer duration. In fact, because it’s inert, it’s also innate. And not much is innate in life. Great businesses need to be managed to avoid fade risk.

(23:06) Even Bitcoin — the Bitcoin system needs to be managed. You need to attract a vibrant community of miners for the system to self-perpetuate. Sovereigns have to be managed. An economy has to be fiscally sound and monetarily sound for sovereign paper to have value over the long term.

(23:27) Commercial real estate has to be managed. But gold is innate. And when we looked at a series of alternatives, we didn’t find much else that was innate and also scarce and dense, so easy to store.

(24:04) The insight that came to my mind is that gold is essentially defensive land. It is the most defensive land and it’s in scarce supply and unlike traditional land that is landlocked to a given community, gold is mobile and so it gets competed for globally. And so I just came to a conclusion that the equilibrium value of gold over time would pace with nominal wealth even though it’s going to be cyclical.

(24:31) And so it wasn’t a brilliant insight per se. It was just a common sense observation. And I will also make the point that because we appreciate gold, it doesn’t mean that we’re gold bugs per se.

(24:50) We appreciate gold for its role as potential ballast in our portfolios. But if you think about our approach to stock selection, which is combining both scarcity and a valuation margin of safety, the same applies to gold. If you buy gold after it’s done very well for a very long period of time, it will remain a scarce asset. But if it doesn’t have a valuation margin of safety, it can go a decade or two in the wilderness in terms of its real return.

(25:18) I would say as gold has recovered from being rather depressed relative to the value of equities and relative to the value of government debt, the risk-reward for gold is now more symmetrical than it was when it was at a much lower valuation.

(25:35) It’s still a mid-teens percentage of our portfolios if we combine bullion and gold miners together. But I will point out that on pockets of strength, sometimes we’ll sell some gold here and there so that it doesn’t become an outsized position in our portfolio.

(26:33) We’ve thought a lot about this question and it still serves a valuable role in our portfolio. But I just want to highlight for investors that having done well for some time, the risk-reward is more symmetric than it might have been a couple of years ago.

(26:57) When you look at specific companies that you own both domestically or abroad, whether it’s a Becton Dickinson or a FEMSA or a Hoshizaki or a Grupo Mexico or SLB, Workday, things like that, can you take a couple of them that embody the kind of durability and resilience that we’ve been discussing?

(27:30) One area that had been quite out of favor has been healthcare. But not every healthcare company is created alike. Becton Dickinson is a good example of what we do because Becton Dickinson is a company that has really honed its focus over the last few years.

(28:07) They spun out their diabetes business into a new company called Embecta. They recently spun into a reverse Morris trust in exchange for a stake in Waters, their biosciences and diagnostics business, and they really focused their business in on what is a world leading franchise for syringes and catheters.

(28:28) Every time you go to a hospital, it’s likely you’re going to encounter a syringe or a catheter. And they have more than half the world market for syringes and catheters. It’s a company that has very strong market share position that gives it certain scale economies in manufacturing, in R&D, and it’s embedded in the hospital system.

(28:53) They are closest to the patients. They have the ability to participate in what I would call a regenerative feedback loop. They know what technology can be added to the syringe or catheter to make it more efficacious over time because they’re closest to it in the most number of locations. And it’s a very strong company that’s very free cash flow generative.

(29:12) And because healthcare has been out of favor, it’s available at 12 to 13 times earnings. And so if you invert that PE ratio, that’s an 8% earnings yield, which basically means that the market’s not expecting much by way of growth for this company at all. Yet if we think back to the conversation about positional assets, they have a very strong position.

(29:43) Over time as more and more medications — not in pill form but biologicals — syringes and catheters become more important. And they’re adding more software and systems technology in a hospital to deliver these things more efficiently. You can imagine AI being used such that a nurse doesn’t have to walk in to monitor your dosing every hour. It could be monitored remotely and instantaneously. That’s a good example of a business that has scarce intangible assets, high market share, and it’s almost like a royalty on a small slice of the world economy.

(30:10) The company having brought focus to the business is now able to use a decent amount of its free cash flow to pay healthy dividends and to buy back stock at these depressed valuations.

(30:29) Can you unpack the idea of a collection of eclectic royalties? Sometimes in investing, mundane can be beautiful. Almost everyone wants an opinion on AI because it’s the focal point of the market. And so by definition, trying to predict which company’s going to be the greatest AI beneficiary is going to be a more competitive enterprise than identifying a company that really has a strong position in a small slice of the world economy. That’s what we really mean by an eclectic royalty.

(31:16) Hoshizaki is the world leader in commercial ice machines. If you go to a restaurant or a hotel or a stadium, more likely than not, you’ll find a Hoshizaki ice machine there. This is a niche technology where they’ve developed a reputation for the best quality. And given their scale, they have the ability to produce quality at reasonable cost.

(31:37) Around that core, they’ve been able to add to that royalty. They’ve expanded into other areas of the commercial kitchen. The company’s listed in Japan. It’s not a household name and so it doesn’t trade at a premium valuation. Right now the company trades at about 8 to 9 times EBITDA, which is well below where most LBO activity has been done in the private markets. They have a competitor in Germany called Rational that trades at 20 times EBITDA.

(32:05) It’s an undemanding valuation, strong market position. It is an eclectic royalty. Management have been great stewards of the business long term. They’re very strong in what they do and they’re now at the margin focusing more on capital allocation.

(32:22) If you have a royalty, it matters not just that you maintain that market position, but you do something sensible with the cash flow. Increasingly, they’re using their free cash flow to pay dividends and buy back stock, which is quite different from a decade or two ago in Japan where the norm was to hold their capital.

(33:01) The mental model for us is the toll collector in different industries around the world. If you give an analogy, if you just have a sequence of numbers 1, 2, 3, 4, 5 up to 3,000, only a certain percentage of those numbers are going to be prime numbers. Most numbers are derivatives of other numbers. And a great business is almost like a prime number. By definition, there are several thousand companies that we could invest in around the world, but maybe only 10% of those are primes that really hold that scarce market position.

(33:44) At any given point in time, most of those prime businesses are going to be quite fully valued. But if you knew the prime piece of real estate you’d be willing to live in in any of the 400 major metropolitan areas of the world, in any given point in time, something would be happening somewhere that would give you the opportunity to buy your dream home at a reasonable price.

(34:04) And so by virtue of knowing exactly what we’re looking for, but by having a global universe across all industries, we can essentially wait, let time do the work for good businesses to come into a valuation zone because of some difficult exogenous environment. Ours is a waiting game. It’s almost like the business gardener is waiting for the right time to plant the seed.

(34:33) Once we bought, it might take us a decade to get a business we like at the right price. We then look to own it for the next decade. And so the cycle time is incredibly long.

(34:50) This emphasis on patience seems absolutely critical. This willingness to wait a long time until companies become cheap enough for you to buy them and then your willingness to hold them typically on average for about a decade.

(35:08) And you’ve once said to me that no commodity is in scarcer supply or more valuable than patience. It really is difficult psychologically because we’re wired in annual cycle time. Going through primary school, you go from one grade to another. You go through college one year to another and then you finally get your job and you get your annual review. We’re kind of wired in annual cycle time and people want results over the next year or often sooner.

(35:54) Interestingly enough, some of the most reliable sources of outperformance in markets take a lot of time to play out. Going back to the analogy of the garden, stuff that grows quickly isn’t necessarily the best. Moliere, the French playwright, said the best fruit comes from the trees that are the slowest to grow.

(36:14) I think that is true in the world of investing because if you think about the benefits of a scarce market position, the cash flow generation cycle, those benefits of pricing power and more free cash flow don’t really make a huge difference in any given quarter or even that much over a year, but they do accumulate over a decade.

(36:35) If you’re trying to align yourself to management teams that are either founders or think like founders or families that have a generational perspective, sensible capital allocation decisions don’t always look like the hot choice in any given moment, but they sure make a difference over a decade.

(37:01) And likewise, the degree to which a business has incumbency advantage, back to the melting ice cube analogy, if it has a slower melt rate than the typical business, in the short term it doesn’t really affect sentiment that much, but over a decade, just being more of a positional asset will make a difference.

(37:24) And then finally, an element of the investing approach is seeking a valuation margin of safety. The 2% or 3% incremental earnings yield or free cash flow yield you get today by demanding a margin of safety doesn’t really dominate return in the short term. In the short term what dominates returns is shifts in sentiment — risk on and risk off. But over the long term the power of arithmetic is inexorable.

(40:24) And so if you have a higher earnings yield or free cash flow yield and the business does grind out growth, arithmetically your returns will converge over time on that. But arithmetic takes a long time to become statistically significant. And so all of these things require patience.

(40:44) If you were to look at the average turnover of a mutual fund or a hedge fund, it probably implies less than a one-year holding period. That’s renting a business. That’s not owning a business.

(41:03) We’ve basically said we are going to be patient investors because that’s where we see more reliable ability to add value. A challenge is obviously keeping clients with you on that journey. And there can be years at a time where that is not rewarded by markets.

(41:30) How did you handle it emotionally during that long period of 12 years or so, maybe even longer, maybe 15 years, where it was just much easier to make heady amounts of money if you invested in mega cap tech and growth stocks in the US?

(41:54) Well, firstly, you have to acknowledge that it’s not easy. Anyone who tells you that it’s easy to handle that is probably just insensitive to the cues of the environment around them. There were times when it was tough when you and a team of people around you are doing something that you think is prudent stewardship and people outside that team feel like they’re being let down because you’re not participating in what’s doing very well.

(42:29) And then you have to step back from it and say, well, what gave us conviction? Firstly, the knowledge that ultimately arithmetic does play out. As long as the businesses you bought weren’t fading at a faster rate than the typical business and you bought them at decent prices and they had something special about them that would accumulate and manifest itself perhaps unpredictably.

(42:57) One analogy I’ve given is it’s almost like when you’re making popcorn and you put the corn kernels in the microwave or in the pot and you heat them up, it’s very difficult to predict which popcorn’s going to pop and when. But if the process has integrity, then most of it’s going to work out okay.

(43:13) One of the things that helped us get through that period was really focusing on the process. There’s a book that kind of impacted me in this regard, which was The Snow Leopard by Peter Matthiessen.

(43:37) Here’s this individual who suffered an enormous personal loss and he goes off in search of the snow leopard and doesn’t know whether he will find the snow leopard or not but at the end it’s not about whether that mission was accomplished per se. It was actually about understanding that it’s the task itself that matters and the reward is in doing something well.

(43:56) And so we spent a lot of time as a team thinking about: are we doing our research well? Are we really thinking about business competitive advantage? Are we thinking about how to value intangible assets? And are we staying true to a time-tested approach? Focusing on the quality of the process is really the core source of stamina.

(44:28) Realizing that it’s not about getting exogenous rewards at all points through time, but there’s something super satisfying to doing something that’s intrinsically worthwhile and having it rewarded episodically. And if anything, selfishly, we’re probably luckier than a lot of other professions. I think of the art world where by definition if you are a cutting edge artist it may be generations before the value of your work is truly perceived.

(45:16) “The Sherpas are alert for ways in which to be of use, yet are never insistent, far less servile. Since they are paid to perform a service, why not do it as well as possible? Yet their dignity is unassailable, for the service is rendered for its own sake. It is the task, not the employer, that is served.”

(45:52) One of the things I think that’s critically important in investing is that you have to be investing in a philosophy and with a group of people where you can be comfortable in your own skin.

(46:13) He had some beautiful expressions in that book where he was becoming comfortable with himself — washing away the thorns and thickets, fears and prejudices, anger and expectations — to just be comfortable with who you are.

(46:41) And the other thing that happened in that book is that despite all of the issues that he’d been going through, he sort of arrived at a simple destination where he was able to just stare and wonder at the beauty of the world around him.

(46:56) I’ve often said to my kids, I can’t imagine doing a job that’s more interesting. I have wonder for the things that I get to learn all the time. You travel the world visiting different companies trying to crack the code one stock at a time and then you try to make sense of events. Nothing could be more interesting and just the wonder of being able to observe that is its own reward and source of staying power.

(47:16) And so I thought the book was very valuable. There’s also a beautiful audio version that he read himself as an old man in this really gravelly kind of broken voice.

(47:42) Perhaps in the days left to us we shall never see the snow leopard, but it seems certain that the leopard will see us. And then he says later: “If the snow leopard should manifest itself, then I am ready to see the snow leopard. If not, then somehow — and I don’t understand this instinct even now — I am not ready to perceive it, in the same way that I’m not ready to resolve my koan. In the not-seeing, I am content that the snow leopard is, that it is here, that its frosty eyes watch us from the mountain. That is enough.”

(48:34) Sometimes the act of seeking something makes it recede into the horizon. Like a good Zen koan, the only resolution to the puzzle is to become at peace with the fact that you may never see it because that’s its inherent specialness, its ability to evade.

(49:11) There was a good book written by a University of Chicago economics professor, Galenson, called Young Geniuses and Old Masters. He found something that was quite different from his hypothesis — it was bimodal. Typically young artists had a stunning new insight and their best works were their first, or there were old masters who were chasing the equivalent of the asymptote but never got there, were iterating towards something, and their last work was their best.

(50:01) Another book that we’ve discussed a lot in recent years is by Iain McGilchrist, this brilliant Scottish polymath who was a fellow of All Souls College at Oxford and an Oxford literature professor and then inspired by Oliver Sacks, gave up being a literature professor and became a neuroscientist with this deep passion for philosophy and music.

(50:33) He wrote this book, The Matter with Things, which is subtitled Our Brains, Our Delusions, and the Unmaking of the World.

(50:53) It’s about 2,000 pages. It definitely rewarded the investment of time. I think it’s a brilliant book. If I could do it the injustice of trying to condense a couple thousand pages into a key insight: we’ve grown up in a time following the Scottish Enlightenment where linear reductionist thinking is the perceived path forward.

(51:35) AI is the ultimate manifestation of that — that we can construct these models to predict the next word that are going to solve all of our problems. He starts out the book with an analysis of left-brain versus right-brain behavior. What we think of as the scientific revolution and this reductionist critical thinking approach is a very left-brain activity.

(51:58) The right side of the brain behaves very differently. It’s basically about nonlinear pattern recognition. A lot of psychological disorders really involve patients that have overactive left brains and are missing basic pattern recognition, empathy and other things associated with the right brain.

(52:18) The right brain has the ability to recognize what he would term flow and emergence in systems and the role that we as humans have in actualizing potentiality and in perceiving beauty.

(52:42) It really helped me deepen the analytical understanding of why thinking about investing as a business gardener makes sense. Because the market is not a machine. The market can’t be digitized and reduced to very specific models. It’s an emergent system and it’s inherently complex in nature.

(53:03) You have to work with the elements like Seneca’s sailor rather than imagine that you sit outside the system and you can predict the wind with precision.

(53:36) In the preface, Montesquieu the French philosopher and jurist basically said: don’t read quickly what has taken me 20 years to put together.

(54:01) A lot of the great investors do seem to be left-brain dominated rationalists. I remember Dalio talking about markets as a machine where if you really could study the cause and effect relationships in enough detail, you’d be able to chase it all down and it would all become incredibly logical.

(54:34) It may actually be really useful in practical terms to guide you through a complex world to have this kind of very rational system and framework. But one of the challenges is this question of how you harness the strengths of the right brain and avoid the limitations of linear left-brain thinking.

(55:00) One of the challenges for thinking about markets in a linear sense — McGilchrist provides an analogy with an ant colony. Linear relationships only relate to slicing time in a small moment. If you look at an ant colony from above it’s a complex system that seems very self-organized. At the level of the ant colony, the ants are just going out and looking for food and they leave a pheromone trail when they find it and other ants pursue that.

(55:39) But then if you drill down another level and get into the cellular dynamics of the ants, it’s a complex system as well. Where you slice that system to think about cause and effect impacts your sense of correlations. The same can be said in systems like the market where the underlying economy is complex and then markets are another layer of complexity because they incorporate expectations about the future of the economy. It’s the interplay of complex expectations and complex reality — complexity squared.

(56:12) An author who had a big impact on me early on was Stephen Wolfram who wrote a book called A New Kind of Science and basically showed pretty conclusively that unless a system is obviously simple, it’s inherently computationally irreducible and inherently almost equivalent to randomness.

(56:31) There’s enough of a complexity threshold in markets that even if there are deterministic elements, they’re very hard to basically rely on. Charlie Munger, even though he had very disciplined left-brain models, also had big pattern recognition. Charlie talked about the Lollapalooza effects. He was very focused on the dynamics of incentives and human behavior and the role of empathy and understanding.

(56:51) Ray often sees the bigger picture in terms of the evolution of different systems. I think on the one hand they are looking at historical patterns, but on the other hand I found both of them to be very thoughtful about some of the bigger patterns that are at play.

(57:29) Sometimes you’ve got to think about the elements of the system that might have a skew to them over time. While the system may be unpredictable in the short term, something like fiat money has agency cost. It’s easier to stimulate in times of crisis — run big deficits, run zero interest rates — than to do the opposite in good times.

(57:52) No one wants to take away the punch bowl. And so even though currencies go through cycles and interest rates go through cycles, over time most forms of man-made money have died eventually or been diluted substantially. You have to hang on to angles that persist through the noise. They’re inherently behavioral in nature.

(58:10) Number two, you have to resist the temptation of trying to predict everything all the time. That brings us all the way back to where we started this conversation — the current events in the world and trying to develop a portfolio that can endure through uncertainty.

(58:28) Recognizing uncertainty is almost like recognizing that you might not see a snow leopard. It will certainly see you, just like uncertainty will certainly impact you. But if you can structure your affairs to endure it, that’s perhaps the learning from all of this reading.

(58:48) The central learning is: focus on getting down the slope safely.

(59:19) Sam Harris, who’s brilliant but kind of annoys me — Harris was always obviously the smartest guy in his class and was used to everyone conceding to his arguments. He launched into this very dismissive diatribe about people who believe in some kind of afterlife. And McGilchrist, who despite Harris’s intelligence is just clearly another order of intelligence and wisdom, came in really beautifully in this lovely gentle way, talking about how little we know.

(1:00:05) He said: “It really behooves us all to be rather humble.” And then he started to explain how even something like what we know about matter and consciousness is vanishingly small. He said: “The more we know about matter, the more mysterious it becomes. The reductionist philosophers and biologists come to us and say we think it can all be explained by physics and they think they’re being very hard-nosed.” And in truth, he said, “it’s all rather complicated.”

(1:00:22) It was like this reminder from the smartest guy, this great polymath saying: it really behooves us all to be rather humble.

(1:00:43) If you don’t bring humility to investing, you don’t really require a margin of safety. If you think you can predict the future, you’re going to pay up for it. Therefore, you’re more likely than not to make mistakes because you’re going to be more inclined to value something on your subjective view of the future over your objective knowledge of what the price is today.

(1:01:04) Having a degree of humility is almost a condition precedent to being a prudent investor. It steers you in the direction of finding scarce assets and waiting to buy them with a margin of safety in price. Without having an element of humility, you don’t feel the need to do that.

(1:01:39) Fred Martin, this great investor who’d come of age in the late 60s and early 70s, once said: “There are two types of investor. There are humble investors and investors who are about to be humbled.”

(1:01:56) It is a business that humbles you over time. That’s in some ways part of the beauty of the business because it basically weeds out those people who are committed to it for the long term versus who dabble in the short term.

(1:02:12) I think it’s one of the most interesting jobs I can conceive of. And yet it’s produced a lot of challenge along the way. The reward comes through learning from upsets in the journey. Making sure every mistake is an asset ultimately because you’ve learned from it.

(1:02:35) There was a lovely quote from McGilchrist’s book: “Nothing good is achieved without a degree of adversity being overcome. Health, resilience, courage, skill, knowledge, virtue and wisdom are no exceptions. As Seneca is famed to have put it, a gemstone is not polished without friction, nor is a man without adversities.”

(1:03:21) Churchill had really forged ahead unilaterally with Gallipoli. That was a huge loss for him. But when we think of Churchill today, we really think of what he did in World War II, what a difference he made in history. Having survived that adversity probably had a profound impact on him in later years.

(1:04:16) Those sort of alternative histories remind you that actually things might not go your way and you better be pretty careful. The fate of an entire country can rest on a random action. That’s the key trait of a complex system — the outcome is very sensitive to the input.

(1:05:06) If we’re looking back and trying to sum up: accept uncertainty. Have some ballast in cash and gold. Own some stocks that are likely to be more durable and resilient. Not necessarily the hottest sexiest things, but likely to be durable.

(1:05:48) It’s not just about identifying businesses that have some kind of scarcity to their market position, but being sensitive to your entry point from a valuation standpoint. Ultimately, you’re most likely to benefit from those businesses growing if you haven’t paid much for the growth.

(1:06:08) Having both scarcity and value in a stock pick helps position you for uncertainty. There’s no silver bullet. If you want no risk and you just sit out in cash, just know that over time the growth rate of government debt is likely to exceed the yield on that cash.

(1:06:26) The amount of cash that we would sit on in our portfolios is only that which we think we could realistically deploy in a market drawdown because the return on that cash isn’t just the yield but the option value of being able to buy a great business at a great price.

(1:06:54) Uncertainty will happen to you. You will have drawdowns. There will be states of the world where you suffer loss. But if the underlying businesses have staying power and the arithmetic of the investments makes sense and you have some balance that you can deploy in those weak moments, you’re going to be okay long term.

(1:07:43) Stick to an approach as opposed to feeling that you have to do what is hot today because what is hot today is rather ephemeral and often results in stunningly disappointing returns when the market’s focus shifts.

(1:08:03) You also have kind of a rich life outside the game. You once said it’s actually kind of helpful to do lots of travel and read lots of books. It opens your mind more and actually helps you as an investor.

(1:08:50) If I spent all my time sitting in front of my computer screen reading financial statements, it could become a rather left-brain activity. If the goal is to promote pattern recognition and to see the world in a way that’s different from other people, having interests outside that field of linear inquiry is really important.

(1:09:24) I’m a very casual player of backgammon. It’s a fun game and humbling as well. Many of the patterns that emerge in backgammon have provided analogies for how to think about portfolio construction. I loved researching the great wines of the world and studying the great winemakers has informed how I think about the job of being a business gardener — the selectivity, the curation, the patience.

(1:09:58) I have an enormous debt of gratitude to my wife Melanie who has kept me socially active. Otherwise I might just be left to my devices, my books, and my financial statements. She’s exposed me to a myriad of different ways of looking at the world. And then travel is the same.

(1:10:43) Whether it’s trying to learn a new sport — I tried my hand at picking up sculling, something I hadn’t done since high school — or when my daughter started getting golf lessons, I got a couple of golf lessons. These are things that I may never be great at, but when you take your neural wiring to a level where you’re not comfortable at something, I think it broadens the range.

(1:11:02) Just being more monolithically focused on the task at hand tends to produce more left-brain thinking. Having this other engagement with the world, being open-minded to broad fields of engagement, is good for the right-brain activity. I think it helps the art side of our business.

(1:11:25) There’s that beautiful line from McGilchrist: “I suspect that the appreciation of beauty is one of the things life is for.”

(1:11:48) McGilchrist cites a number of philosophers that have come up with the notion that humans basically exist as a form of complex evolution so that the universe can perceive itself. Whether you’re looking for beauty in a business or in a valuation entry point or an old master painting or the way you play a sport or a game or the relationships that you have — I think that is a uniquely human endeavor, to find what’s wonderful around you.

(1:12:14) Abraham Heschel, who wrote this book on Shabbat, a famous book On the Sabbath, said: “Mankind will not perish for want of information, but only for want of appreciation. The beginning of our happiness lies in the understanding that a life without wonder is not worth living.”

(1:12:36) One of the things that I find so motivational — I come to the office and we have a team of people who are in search of their own wonder in their different industries and in their own personal lives. When you get a team of people doing that for a long period of time together, it’s quite powerful. Cumulative team years is a really important element of our business — building the guild. That shared experience helps you think about the way another person might be looking at a problem.

(1:13:27) Given the nature of our approach that requires a degree of variegation, it’s a team-based approach.

(1:13:45) Thank you for everything. You just enriched my life in so many ways. It’s important to surround yourself with people who help expand the way you think.