The Value Perspective Podcast episode – with Steve Gorelik

https://schroderstvp.podbean.com/e/the-value-perspective-with-steve-gorelick/

Chapter headings for Steve Gorelik on The Value Perspective Podcast

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* Steve Gorelik, welcome back ...

* Origins of an emerging markets fund

* Seth Klarman and a case of déjà vu

* Philosophy of value. Rule of law

* Open minds and mental frameworks

* Nothing new under the sun – or is there?

* A book recommendation and a mistake

JTR: Steve Gorelik, welcome back to The Value Perspective podcast. It is a pleasure to have you here again. How have you been?

SG: I’m very well. Thank you for having me.

JTR: Could you please give us a brief intro for those who may not have come across you or Firebird before?

SG: Absolutely – and, once again, thanks for taking the time and for creating such a wonderful podcast and giving me an opportunity to be a part of it. My name is Steve Gorelik and I am head of research and a portfolio manager at Firebird Management, a New York-based firm that is best known for investing in Eastern Europe, which it has been doing since 1994. Eastern Europe obviously includes Russia but, in our case, we were one of the first investors in many of the other countries within the region, such as the Baltic states of Estonia, Latvia, and Lithuania as well as Romania, Bulgaria, Georgia and Kazakhstan.

We were one of the first firms to invest into most of these places, we have fantastic relationships within those countries and we have learned a lot over the years – it has been a really fulfilling time. I have been with the firm – it is hard to believe – for 16 years. Prior to that I went to business school, where I studied applied value investing, and before that I spent a few years as an operational strategy consultant. As for my background, I am originally from Belarus but have lived in the United States for most of my life.

JTR: And where do we find you today?

SG: Today, you find me in London. It was a family decision to move here a couple of years ago and it was an interesting time to do so – during Covid. In a lot of ways, it has worked out a lot better than I thought it would while, from a business point of view, the interesting learning has been how many wonderful people there are in the investing community in London and the number of people who invest all over the world, including Eastern Europe. Also the amount of communication we can have with people in Eastern Europe has improved. I have been in London for the last couple of years and a big part of what we do is travelling and meeting with companies and meeting with managements. Obviously that has been much more difficult over the last two or three years. Being able to communicate with companies from London – it is not the same as going to visit but it is definitely better than speaking on the phone.

JTR: How does it work when the head of research is based in London and most of your team is in New York?

SG: It helps to have a great group of people to work with and they are also a very experienced group of people. The youngest person on our team has been with us for seven or eight years, I think – it has been a long time so it is hard to remember – while a number of these people are the founders, who have been here since the beginning in 1994. So we are very comfortable with each other and with the modern tools of Teams and Zoom and so on.

It is not the same as meeting people in person but it definitely gets you close enough from the point of view of being able to communicate, speak to each other every day and ensure everybody knows what they are doing. We are missing that element of spontaneous communication, where we can come into each other’s office and ideas develop – although we do try to recreate that through daily meetings. We still see each other – not as regularly as we did before but we still do see each other. So it works out well. I can’t say it is our preferred way of doing things but it definitely works.

Origins of an emerging markets fund

JTR: I would like to start by exploring the mindset needed to invest in markets where there is a higher degree of uncertainty than you tend to find in more developed economies. You just mentioned Firebird was founded in the early 1990s – in fact, it was one of the first American funds to move into Russian equities and even into Eastern European equities. So can you walk us through where the original idea came from? And how did the fund think about the opportunity set and the associated risks back then?

SG: First of all, I should be clear that I was not there in 1994, when the fund started – but I have definitely heard quite a bit. The opportunity within Russian equity investing came from the Russian ‘voucher privatisation’, where the whole economy of Russia was valued on these pieces of paper – for people who lived in Russia at the time, they were just pieces of paper that all of a sudden had value and had bits of the economy associated with them. Altogether, though, these pieces of paper were valued at between $6bn and $9bn for all of Russian industry and all of Russian natural resources and everything that is there.

So the opportunity was one that not a lot of people understood domestically – and that would include people like my parents. They did not know what it all meant but international investors saw what was happening there – including the founders at Firebird – which was this opportunity to come in and to be able to invest into these vouchers and then use them to buy shares in companies that were becoming privatised by the government. That was the beginning of Firebird. That was the idea the founders had and they raised a reasonable amount of money – both internally and from outside investors. Initially, that was supposed to be the trade – you buy these vouchers, you exchange them into assets and then you sell them.

Once they got involved in Russia and also saw the opportunities elsewhere in the region, they realised it could be more than just a short-term or medium-term trade and could turn into a long-term investment destination – because of the changes they were starting to see emerge within Russia. And then we got to see a little more about what was happening with these former socialist republics – which were becoming separated from Russian influence and were now more influenced by the European Union – and learn how the economies were developing there and start to invest into that. That was the reason why we as a firm went into places like the Baltic countries and why we went into Romania.

So the initial opportunity was there from the point of view of just buying assets for pennies on the dollar, which is a very traditional value approach. When you go back through the history of value investing, you go from Graham to Buffett, right? So, as a firm, we have also gone from Graham to Buffett: we started out buying ‘net-net’ – that is, if you could try and figure out what the companies actually had – but you were definitely not paying a lot for the wonderful natural resources that were there. Over time, however, the economies developed and our investment process has developed to be more Buffett-like, where we would be buying fantastic businesses at more than reasonable prices. And that is really what our firm has evolved into today – as the market has evolved, we have evolved with it.

JTR: Could you talk a little bit about the founders – how many were there at the start and what was their background? And how did they manage to convince – and who did they manage to convince – to go and invest their capital in a market that only a few years earlier had been completely uninvestable?

SG: There was four founders in the beginning – two of whom are still involved with the firm. They are making investment decisions on a daily basis and I am honoured to be working side by side with them. But in the beginning there were four people and, interestingly enough, only one really had anything to do with Russia and Eastern Europe. They were all Americans, one of whom spoke Russian. He was a political analyst and a translator by training but he learned Russian in college; one was a lawyer; and another one was a professor. And they knew each other from previously, saw an opportunity, had enough background with financials to be able to put it all together and decided to start a firm.

As for the initial investors, a lot of them were, funnily enough, value people, who have been around for a long time – especially the ones involved in arbitrage-type strategies. And what they saw in what our founders were doing was an opportunity that was very similar to risk arbitrage. So a lot of the initial investors were people who were interested in that. Quite a few investors also came through Marc Faber’s newsletter, Gloom, Boom, Doom. He was one of the early supporters of the firm and we got a reasonable amount of exposure through that. So that was the beginning.

Seth Klarman and a case of déjà vu

JTR: Hindsight can be a dangerous thing. Especially when people did not live through a particular event, it is so difficult to grasp the uncertainty of the decisions that were made or the moment in time or the context of what others were living through. So, in some ways, it is easy to picture starting a fund to invest in Russia or Eastern Europe in 1994 – but that must have been a time of huge uncertainty. In that context, I would be very interested in your thoughts on a great note written by Seth Klarman, who is very well-known among value investors, if not so much beyond that. At the end of the 1990s, Klarman saw an opportunity to invest in emerging markets and, in a letter to his investors, highlighted how a lot of the characteristics that underpinned value investing in the 1930s were now present in emerging markets in the 1990s: less competition; less efficient markets; limited access to information; opaque accounting methods; and no concept of management working to create value for shareholders. That is pretty much what you faced in Russia in the 1990s but you still had to be very brave to invest.

SG: Yes and no – because, when you buy assets at pennies on the dollar, you should understand that you have a lot of room for error. You also understand that the people who are trusting you with their money – more likely than not – are doing it with an amount of capital they are able to put into something really risky for what could be a fantastic pay-off. So you enter into the investment with those things in mind – that you are operating out there on the risk/reward spectrum and you should be acting accordingly.

One of the things we do because we are operating within emerging markets – and I know some firms do it differently – is we run a relatively diversified portfolio. So we would never feel comfortable running a portfolio of 10 stocks because, no matter how well you know the company and how well you may feel about a particular country, something may happen in emerging markets that would lead to all of those assumptions being turned upside down. And if you are running a highly concentrated portfolio, it is very difficult for you to get a second chance to invest again.

So our portfolio is 30 to 40 stocks, which provides us enough diversification but, at the same time, enough concentration within our best ideas. We thought that was the best way forward – and, also, we have had some situations where things did not work out as we planned but it did not hurt in the long term. So that is one illustration of how we approach investing in emerging markets – we focus on diversification. That is both on a country level – one of the reasons we went into other countries within eastern Europe is to provide diversification and not to be a country fund but a regional fund. Then also on the company level, as I already said, we do not feel comfortable having overly large positions within the fund. So that helps.

From the point of view of access to information, which you touched on, that is something that has changed over the years – and, I would say, for the better. When I started at the firm in 2005, one of the competitive advantages I had is I could read and understand the Russian statutory financial statement, which was usually 250 pages of gibberish – of which there were maybe 10 to 12 pages of useful information that is not necessarily in the same format as you would expect if you were reading an IFRS financial statement or a GAAP financial statement. And that was my competitive advantage at the time.

A few years ago, however, Russia had to start reporting to IFRS standards and so now everybody has the same information. The opportunity set did not change, though, because the people on the other side of the trade from you, if they are local, they are still operating with the same information they did before. And if they are international – at least in our experience – just because you can read the financial statement in English or it is in an IFRS format that you are more or less used to, it does not mean you re comfortable investing in the region because of all of the macro concepts. These may or may not actually be true but people do have preconceived notions when they are investing in certain places that are not their home market.

People have preconceived notions about their home market too but that is a different conversation! Still, when you invest abroad, the information you obtain about a particular company can only get you so far. There are famous stories about value investors buying South Korean equities at a P/E ratio of 2x or 3x but they did not then make money because they figured out something was trading at 2x or 3x – that was pretty obvious. They made money because they took a chance on an opportunity and the opportunity worked out a certain way.

The markets we are investing in are, for the most part, trading at mid-single digit P/E ratios – that was happening before the conflict and it is definitely happening now. You do not need to know how to read a financial statement to understand that – but to get comfortable with what you are buying on the other side and why it makes sense and why the people are allocating capital in a way you are comfortable with? That is a very different story – and that has been what we think is our value-add. That is what allows us to invest in a market that could be perceived as extremely volatile and extremely difficult to invest in.

JTR: As you explained, Firebird was launched in 1994 to take advantage of this amazing opportunity to buy very good assets at very low valuations that reflected the uncertainty and the risk the market participants saw in those assets. Then, four years later, there is this massive emerging markets crisis that started in south east Asia before moving on to Russia – and the Russian market just plummeted. There was a flight of capital, a lot of people were talking about capital controls and, again, valuations hit extremely low levels. I know you were not at Firebird back then but can you tell us how the company managed to navigate that period of uncertainty and stomach that period of volatility?

SG: In this business, you always have to remain an optimist. And then, when you see the changes, while they could be volatile while they are happening, do you still see the country moving in the right direction? Do you see the people moving in the right direction? At the time – and as you mention, I was not there, but I have heard some stories – what did help was to be in contact with the people on the ground and to see they don’t just have this ‘deer in the headlights’ reaction to an economic crisis, but that they are learning to navigate that

In my 16 years at the firm, unfortunately, we have been through a number of crises so I have seen this, in my own experience, with countries like the Baltics, in 2008, when everybody was saying they would devalue their currencies and we were going through an economic crisis. But we took an informed view that was not going to happen. And what allowed us to do that – and what allowed us to be right at the end – was that we had a number of conversations with company managements on the ground, to find out how they felt about devaluation, what they were doing to manage the financial crisis, what they were doing on a day-to-day basis.

My background as an operational strategy consultant helps me to ask the right questions to get to the right level of comfort in terms of what is happening – and I think that is the lesson from any crisis that is going on: try to see what the companies are doing while the crisis is happening. We invest in companies – that one share we own buys us a right, a small ownership in a company, and that gives us an opportunity to go and talk to them and to discuss these things. So that has been the learning from the 1998 crisis – and from every crisis after that – try to understand what people are doing on the ground.

Philosophy of value. Rule of law

JTR: That is a great segue to my next question. We recently had your friend Milo Jones on the podcast – and thank you very much for providing that introduction. It was fascinating. He made the thought-provoking comment that value investing was an Anglo Saxon invention, which had worked very well in markets that had come out victorious in the Second World War. Among other things, he alluded to the rule of law as one of the most important variables underpinning the strategy. As a value investor specialising in emerging markets, do you agree with Milo and, either way, what do you think has made you so successful at investing in these markets over 30 years while applying the value philosophy?

SG: Milo is a great person! I caught his comment on the rule of law from your podcast as well and it gave me a lot to think about. The rule of law is important from the point of view of our investment process or at least ... what is the best way of putting this? What we are looking for is the consistent application of a set of rules. That may not be the rule of law in the way it works within the Anglo Saxon world but, as long as the application is consistent and you can count on it over time, you can get comfortable with it. One of the things we learned over the years within our businesses is we could invest in markets that are democratic and not too corrupt because, within those markets, the rule of law still has a lot to do with it. If there is a consistent rule of law then, if there is ever a business dispute, you can count on the application of the rule of law and on the courts to defend that and you will be OK. And as a partial owner of a business – as a minority investor in a business – you have to count on that.

As an alternative, a democratic country that is corrupt does not have a rule of law in the way that can be applied or can be counted upon and what actually happens is, every four or six years, depending on the election cycle, there is a turnover in the people in power. And the first thing they try to do after they come into power is not necessarily to grow the size of the pie of the economy but to figure out how to recut it in their own favour. And within that, as a foreign investor, you are usually the odd person out. So that makes it a difficult place to invest.

A further alternative would be a market that is autocratic and may not have the rule of law in the way you and I would understand it by experiencing the UK or US system – but at least there is a consistent application of a set of rules that are there. And oftentimes, if you read the rules, they are based on some of the best practices borrowed from the Anglo Saxon countries – it is just a question of what happens when they get applied. And in an autocratic environment, when the same people have been in power for a long time, you can kind of get comfortable with how the rules are going to be applied time and time again – while those same people are in power.

Obviously, there is the risk of a changeover and that is not the same as in a democratic regime. A lot of places we invest in, such as the Baltics, elections happen and you may have a change in power but it makes no difference from the point of view of the business environment – similar to the United States or the United Kingdom. There may be some political changes but the way people run their business does not really change. In a place that has an autocratic regime – take Kazakhstan, take Russia – if there is a change in power, we would have to spend a lot of time analysing what happened and what is going to happen next. And that is the risk – that at that point, the status quo does change.

JTR: How can a value mindset help you invest in these markets, which are not Anglo Saxon or may not have been on the winning side of the Second World War, as Milo put it on our podcast?

SG: A value investing mindset – to me at least – means investing into companies’ fundamentals, and having the opinion and the belief that, the way the company is investing the money, expecting a certain three-year, five-year or 10-year return on their investment, they are doing it in a way that you can understand as a business owner and that you can support. And I don’t think that aspect in particular is an Anglo Saxon concept. It could be an Anglo Saxon invention – I don’t know – but there is no ownership of that concept by the Anglo Saxons because you do have fantastic companies that make great investment decisions in Asia and Latin America. It is just that those are very different markets that we, as a business, never felt comfortable with on a macro basis and we just don’t know what we know in Eastern Europe.

But in terms of return on invested capital, that is an international concept that transcends countries. So from that point of view, I think, as a value investor, if you can get comfortable with everything else, you can get comfortable with investing in a country as long as the pie is growing, right? And we invest in countries in Eastern Europe where the pie is growing. The EU countries within eastern Europe, such as Romania and Bulgaria and the Baltic countries, they have a national growth rate, because of the conversion with the broader European Union, that is 2% to 3% higher on a real GDP basis than Western EU members. That has been happening time and time again. So we are investing in places with a national growth rate that is very competitive, which means the companies that are emerging from them have competitive advantages – and we try to invest into those. And they are operating in an environment where the end-market for them is doing well and growing. So as long as that remains the case, we can invest.

The other thing, in terms of how we think about fundamental investing or value investing is there is a natural long-term horizon that comes from investing as a business owner. And that is where, at least in Eastern Europe, you are getting a certain competitive advantage because, often, the people on the other side of the trade from you don’t have the same long-term investment horizon. They could have as much information as you do about the company – oftentimes they could have more – but they see a poor economic outlook over the next three to six months. Or they see another recession coming. Or another 1998 crisis that we talked about earlier. And they are saying, You know what? I don’t want to be here. I’m going to sell and go to cash.

What we are looking at is not the next six months but the next three years, the next five years, the next 10 years – we have companies in the portfolio that we have owned for over 20 years. And, on that basis, you could agree on all of the facts with the person on the other side of the trade. They will agree with you on every single fact and everything that has gone on with the company – but you will make different investment decisions. And we think that gives us a competitive advantage – it has been a significant source of our returns, that long term investment horizon.

Open minds and mental frameworks

JTR: Another thing we discussed with Milo – he approached it from a sociological point of view – and we have also touched on with other guests is the question of backgrounds. You were born in Belarus and raised in the US – so do you think being born in one of these markets, having your family there, having friends in these markets, does that help you understand the risks and see the context of those markets differently from someone born somewhere else?

SG: What I think it does is it makes me naturally more curious about the region. But I would highlight the experience of my partners in Firebird – as I mentioned, they were four people who were not born in the former Soviet Union but were curious about the region and they did remarkably well because they saw the opportunity and they were willing to take the time and to learn and to listen. A lot of what we do is listening and learning and understanding the environment in which we operate.

You don’t have to be from the region – but you do have to have an open mind. You have to understand that things are different – they are not going to be the same as where you come from. And you have to be comfortable with this – don’t put everybody into the framework you grew up with. Then you should be OK. If you try to come in and tell everybody how to run their business and lead their life because that is how it works in the United States, you are probably not going to do well. But you don’t have to be from there.

JTR: That is really interesting. We also had another of your friends, Vitaliy Katsenelson, on the podcast and he kindly walked us through two ‘mental models’ he had been thinking about recently. One he called ‘Myopic circles’, which I thought was particularly powerful. You are a very thoughtful person too so what sort of mental models are needed when you are investing in emerging markets – especially those that carry a risk premium and where uncertainty feels very high?

SG: What we try to do is separate the markets we invest in. Some of it could have to do with the discussion we just had about the rule of law – where you can count on consistent application year in, year out, or it depends on people being in power. And we have different risk premia for different markets. Some markets, for us, are simply uninvestable because they don’t have any rule of law at all that we can feel comfortable with. And that is fine – we just don’t touch them. We have plenty of things to invest in. But a market like Estonia will have a lower risk rating for us, or a lower threshold for an investment from an expected IRR perspective, than a market like Kazakhstan, because of the rule of law, because it is or is not EU and because of the structure of the economy.

So we start our analysis top-down, from a macro perspective, and trying to understand the countries we invest in. Based on that analysis, we assign a risk rating to a country. It is not a formula but more kind of, taking different things into account, what kind of return would we expect from an investment in that country? And we go from there. And then if we can find high-quality companies that we believe will provide us those types of returns, then are they candidates for the portfolio? But if we cannot find anything like that, they are not. So we try to differentiate between the countries based on the rule of law.

JTR: And that is the framework you tend to apply to many of these different markets?

SG: Absolutely. The best thing that can happen to a country you invest in is that the rule of law gets better – or you think it gets better. Then you can go down on a risk curve, from somewhere really out there to some thing ‘just risky’ and that creates a number of opportunities. You see the changes in how people are investing – maybe they are more comfortable with investment projects that have a 10-year payback, whereas before they could only invest in projects that have a two-year or a three-year payback. And that really narrows the type of projects that you can invest in. That really narrows how the economy can grow.

As an example, we think we have seen that positive change over the last decade with Romania, where after the great financial crisis and the involvement of the European Union, they have really tackled a lot of the structural problems they had in terms of the rule of law and in terms of corruption and, through that, they have developed a better business environment. You could see it in their growth numbers – GDP growth for Romania has accelerated within the last five to 10 years. And we think that is the consequence of an improvement in the rule of law. And, if you can capture that and invest into the country when it is still perceived to be really risky, but is turning out not to be, you can generate some fantastic effects.

Nothing new under the sun – or is there?

JTR: Let’s change tack a little bit here to something you and I have discussed in the past. About 10 years ago, you started a side project where you apply your framework to value investing in the US, which was completely different to the set of opportunities you were seeing in Eastern Europe and Russia, where your experience lies as investors. So how is that different, psychologically and emotionally, from the process of investing in Eastern Europe?

SG: Psychologically and emotionally, we are still investing in companies we feel comfortable with. We were looking to expand outside of Eastern Europe and we did not feel comfortable going to other emerging markets, like Latin America or Asia or Africa because we felt we would not know what we know in Eastern Europe – from the point of view of how those markets work and the knowledge we have accumulated over 28 years by investing there. We just felt, as Buffett says, we would be the Patsy at the table – if I were to go and invest in a company in in Latin America because I would not know what I know in Eastern Europe.

So we did not feel comfortable expanding into other emerging markets at the time. That said, we felt our fundamental approach – which focuses on how companies make money and how companies spend money – can be applied in other markets. And, for us, the United States was a natural place to do it because our offices are in New York and everybody who works for the firm is a US citizen – and we are Americans so we did a lot of investing ‘PA’ in the United States. So this was an opportunity to formalise that into something that uses our fundamental investment approach in a more structured manner.

Back in 2012, when I started looking at the opportunity set within the United States, there was a lot of conversation about well, it is only a few years after the great financial crisis, is the economy strong enough? What environment are we operating in? Yet, when I looked at the portfolio of companies I would be able to put together from the point of view of the long-term business owner, the quality of the companies we would have in the portfolio and the type of returns that portfolio would be expected to generate, it seemed really attractive – attractive enough to try with our own money and, when we started telling our friends and family and existing investors about this, they got excited about it too. They said, You know what? This makes sense. We have money invested in the US anyway so why don’t we give you a portion of money to invest as well?

So that is how that fund came about. And, right now, by doing this for the last almost 10 years, I think we have become better – both as US investors and as Eastern European investors – because you learn a lot more about the companies as an owner. And there are a lot of lessons you learn about one company that may or may not have anything to do with an industry or a country that you are investing in elsewhere. But maybe you can take those lessons and apply them to something else and maybe ask different questions when you are talking to the management. So that project and that fund, which has been running, as I said, for almost 10 years, has been a wonderful opportunity for me to become a better investor.

JTR: That is really interesting. The future is uncertain but, as Dominique Mielle pointed out on this show, there is also nothing new under the sun – everything that happens in markets has already happened before. Russia is not the first market to be closed to investors and it will not be the last. Well, that is a forecast and I need to be a little bit careful with forecasting stuff! Having said that, given what has happened over the course of the last five months, what has been your main takeaway and what you would have done differently, if anything?

SG: It is very interesting the way you are phrasing this question because, in terms of there being nothing new under the sun, I would actually say it is a little bit of the opposite – that you have a situation where you may analyse things based on what has happened in the past but they may not happen the same way in the future. So this is an opportunity to learn but it is also an opportunity to make an analytical mistake. If we go to the current situation with Russia, for example, one thing we did not think was possible is this idea of Russia’s central bank reserves been frozen. That has not happened before – and we learned something as a result.

Russia reacted in the way that it did, the freezing of the reserves happened for the reasons it did – and the situation we find ourselves in right now is in part because we analysed the situation based on the set of facts that existed before that. We looked at companies that were sanctioned before in Russia – after 2014 [when Crimea was annexed]. What happened to those companies? What happened to the stock price of those companies? What happened to the business of those companies? We took those inputs into account in analysing and trying to understand what could be the consequences if Russia did not leave Ukraine. The real consequences turned out to be much worse – it was a much bigger invasion, the reaction was much worse and what is happening on the ground is horrible. But the way the Western world reacted to this invasion was not something we thought was possible based on the pre-existing facts.

So, to answer your question, what is constant is that something will always change, right? And, also, you will have an opportunity to learn from what happened. Hopefully, you will have an opportunity to invest again. Hopefully you will have an opportunity to invest in the Russian market again, which is not possible at the moment. But yes, the Russian market has been closed before – but when it closed in 1917, it was closed for 75 years. And if you invested in 1917, you were wiped out – you did not have any assets. I don’t think they allowed you to maintain ownership throughout the existence of the Soviet Union. So if you find yourself in a similar situation right now, you are just not going to be working through that. We don’t think we are in that situation. We do think Russia will become investable again within our investing lifetime. But time will tell when that will happen and why it will happen.

A book recommendation and a mistake

JTR: That is really interesting. Steve, we are coming to the end of our session and we always ask our guests two signature questions. The first is for any book recommendation – or it can be more if you have more than one book to suggest to us.

SG: Since we are talking about Eastern Europe, the book I read most recently and which helped me understand the thinking around what is happening, both within Russia and Eastern Europe, is The Light that Failed: A Reckoning by Ivan Krastev and Stephen Holmes. It talks about the experience of people in Eastern Europe after the fall of the Soviet Union – all of the good and the bad things that have resulted from that, as well as the mentality of what you gain and what you lose. And I thought it was a really interesting study.

JTR: Interesting. And our second question is could you share with us and our listeners an example of a bad outcome that was down to poor process rather than bad luck. It need not be investment-related.

SG: It is always very difficult to think about your mistakes – where you go back and you realise, yes, that was a mistake. I will keep it investment-related. One of the things I am constantly fighting with myself about is buying something just because it is cheap – and, as an emerging market investor, you can make that mistake time and time again. You look at a company, it’s trading at 2x P/E, 0.1x price to book – you know, pick your measure! Come on, how can you lose money? And it is not so much about not losing money but about not making money in a better company in a situation like this. There is an opportunity cost we have to capital.

And I have made recommendations in the past to buy companies simply because they are cheap – and some of those made it into the portfolio and didn’t work. And then over time, when we talk about the evolution of value investing from Graham to Buffett, the way the market works right now is that, if you buy something at a low multiple, you have to have a reason for why that multiple will change – and it’s not going to be simply because it has to. No it doesn’t have to – you could have a company trading at 2x P/E forever and if the earnings are not growing, you’re not making any money. You’re just not making any money. You may not be losing money but you’re not making money – and the investors want you to make money.

JTR: That is fantastic. Steve, thank you very much for coming to The Value Perspective podcast.

SG: Thank you so much. This was wonderful.