Paul Singer | Podcast | In Good Company | Norges Bank Investment Management

0:00 [Music] hi everybody I'm Nicola tangan of the Norwegian so wealth fund and today we are hosting an investor Legend poll singer who founded Elliot asset management and probably the most important activist investor in the world PA warm welcome thank you what is activist investing activist investing is taking a position largely in an equity security of a company um and trying to um engage with the company to uh improve

0:32 outcomes control or influence outcomes better outcomes um to unlock value it could be uh it could be U management changes that are requested it could be U capital structure changes uh Finance um strategies and tactics um uh anything that will U make the company uh earn more money be better better positioned more ra uh uh rationally deploy assets

1:05 why do you have to do this don't companies do this themselves well as you know the U uh Trend away from active investing and by active investing I don't necessarily mean activist active investing just means um you open the mail from the company that you in which you invest you try to figure it out you try to uh understand the company strategy and maybe you'll call the company up and L in some suggestions but U active investing is next to passive

1:38 investing or index investing index investing now accounts for a plurality of money uh money that's managed particularly Equity money uh around the um around the world what kind of steps do you take some of the steps are very um um praic we develop ideas from a variety of sources given our position in the marketplace um sometimes uh people bring us ideas uh sometimes the street brings us ideas um uh sometimes we faret

2:10 out ideas ourselves U the first thing we do is in an IT iterative process um we develop a set of questions different from every uh in every industry and run down the questions uh we talk to a lot of people former employees uh uh customers uh Wall Street analysts um uh a consequence parenthetically of uh the trend towards index investing is that there's less coverage research coverage

2:43 from Wall Street and when I say Wall Street I mean the global U uh uh Investment Banking firms uh in firms that Supply research but we try to become as as informed as possible we try to ascertain the uh local um uh landscape in terms of culture in terms of uh the culture of capitalism uh and U the culture of corporate uh control corporate change um we try to understand

3:14 the board of directors and the management how do how how they got there um um what their strategies are what why they're failing um I mean we don't get involved with highly successful companies that can't be improved really so what is your perfect what's your perfect situation the perfect situation is a u company and this exists um you may be surprised to hear it but uh it exists a

3:44 company which has an open door and by Open Door what I mean is something's been going on for a long time um uh the founder or one generation from the founder um feels a u a moral obligation to um the local shareholders or the uh the original shareholders or the family doesn't want to give up doesn't want to give up the longstanding strategy or Corp uh capital structure or

4:16 alignment or location of headquarters um uh any one of a number of uh reasons why when we come knocking um we not infrequently find a what we what I am accurately calling a an open door and in an open door it's a different discussion but if we're right I mean we're we're not always right of course on on the details of our strategies and sometimes we're just plain wrong um but um if we're right and

4:50 there's um a segment an important segment of the uh the um leadership the board of directors the management um who actually agree with that then it's a then it's a u fairly smooth path to um getting things done how many smooth ones do you have for for the ones who are not so smooth I mean generally speaking how do companies react when pulsing or knocks on the door yeah yeah it's a very interesting question because um one

5:16 thing that is um that is just crystal clear and um and endemic hardly anyone tries to stiff arm us hardly anyone there's the occasional and there's a playbook for that you know we have one firm One Fund and it's large yeah uh and we obvious like $70 billion like 72 right now 72 billion um and we have the wherewithal to to back our uh thesis and

5:47 pursue our approach um so everyone almost everyone sorry picks up the phone the advisers all tell them Elliot you should pick up the phone you should engage with these people um they're deal makers we're dealmakers um uh uh and you will hear them out um and they do and so some of the approaches are under the radar screen some of the approaches um we will file a disclose a position uh

6:21 others we don't disclose to the public um we disclose to the to the company that we have a position um it depends on the rules uh it depends on what what our strategy might be but um a a discussion a detailed discussion of and and a deck um my guys like writing decks like piles of paper large piles of paper yeah with uh graphs and terrible what does it mean to be a dealmaker well in other words

6:51 we're not we're not Crusaders we're not we're not just speaking to hear ourselves speak we're not um engaged to read about ourselves in the Ft tomorrow morning um we have a we have a goal we have a thesis if our thesis is right and the company takes steps which is not always um I would say getting all of our requests is not rare but it's not dominant as the dominant outcome but

7:24 um we're generally pretty right and uh uh and um the things we suggest generally are creative to u to value and so the company that engages with us it's a minority of those companies um which stiff arm us and knock down drag out proxy fights or lengthy litigations doesn't really help anybody but sometimes it happens what's the ratio of of success

7:55 successful outcomes versus not so successful outcomes well since I'm going to Define successful as um we get a meaningful percentage of what we asked for and the stock reflects it not just in 20 minutes but I mean you know over a period of time that we actually our ideas actually add value yeah it's the only way we can maintain our reputation that gets the stock to to say oh

8:27 Elliot's in this here's their the is nobody else has been able to unlock that key the stock is worth more and of course um it's it's not a question of short-termism because um actual short-termism doesn't add value to anyone really um but um it's it's not short-termism when the market instantly overnight or in a couple of days or a few days understands

8:57 that you are adding long-term value yeah you're you're adding Enterprise Value the strategy is better your ability to compete is better and in in What proportion of the cases do you think you are adding value if you measure it in that way well the proportion of cases in which we're adding value is I believe close to 100 the proportion of cases in which it's reflected in uh action movement of structure capital structure uh Etc uh me directors um

9:30 is probably this is just a guess but it's a majority it's like 70% right something something like that it's not 90 it's not 80 I think so for instance last year you uh took action against Starbucks I don't want to be a word Smith here okay let's let's phrase it differently you didn't take but it's important because you made an investment in Starbucks it's important to to to at least get this right in our minds uh because um the

10:00 street sorry the media loves battle and they love to take down successful uh investors rich people whatever um so the colorful way that it's generally um um framed is attack okay but let's cycle back to near the beginning of our conversation this morning fewer and fewer literally fewer and fewer people are um acting like owners yeah and fewer and

10:32 fewer companies are accepting the notion that the owners have anything to say um to to the management and the board it's it's kind of shocking and therefore we are among with with certainly in terms of numbers among the very a short list of people who do call uh for accountability so we and when we win um the shareholders win the the days of

11:04 green mail are uh longer so you so you make an investment in Starbucks and you initiated an um a change in strategy right so they changed the CEO uh change strategy and you made uh you made money do you think you're doing do you think you're making Society a better place it's not the um um I mean I have a variety of political and philosophical and philanthropic uh outlets for my um uh

11:38 compensation um but um and I do think we do make the world a better place not in every single situation but um um this style of investing um is uh it enhances the possibility and the probability that enterprises can Service uh their their customers competition is good having multiple Outlets is uh uh is um useful we happen

12:11 to I mean I'll tell you the most basic answer to your question there are layers of answer um uh to your question but at the most basic level we have like a hundred universities we have hospitals we have um U charity charitable trusts and among the um uh among the elements of what I just uh told you is um because of our we we're not a an activist fund and

12:41 everything else is uh is window dressing we are an absolute return fund which means that you want to make money whatever the market does right and so what the meaning of that to your La latest question is um uh in the infrequent and now a distant memory um uh in the infrequent so seriously adverse uh uh Financial Market environments these people have very few

13:14 investment Outlets that actually perform on that sometimes things don't go your way right what are the characteristics of the Investments which don't go the way you want do they have something in common sometimes it's bad luck uh but um um more frequently it's we missed something we missed uh or or the hedges weren't um they weren't the right Hedges they the track the tracking era was much more

13:45 than we uhu uh than we uh expected at the beginning of my career 77 1977 to like 1987 um uh hedging was much more simple um because we were long a convertible Bond and short the stock into which the convertible was convertible um so that's that's very straightforward um um and um tracking error wasn't really a u a factor um we've become um much more

14:17 sophisticated in uh hedging in creating bespoke Hedges uh for different kinds of uh different kinds of Trades um uh uh and but even those don't U don't work out uh exactly U you know all the time um but sometimes you know the the worst trades uh and I don't mind um mentioning them it's a kind of a form of therapy and pedagogical exercise the worst

14:49 trades are the trades that you U misunderstand the risk you you put it into the wrong category I'll give you two brief examples um one moderately horrifying and the other done really really bad um the one that's moderately horrifying is um a uh a peer who will remain nameless um sold us a late stage bankruptcy in a deinking

15:23 plant somewhere in the northern United States late stage denotes the ri discs are Mo mostly gone in a complicated workout bankruptcy process um uh and the deinking was their business you know waste paper and you're going to deink it and use it again and that's good for the environment it's good for the human race it's good for the Galaxy suffices to say that it wasn't late stage there were important bankruptcy elements that

15:54 hadn't been settled and the deinking plant didn't really work so aside from hating the person that sold it to me um um that's just it's just a just a mistake um and we lost it wasn't that big a position but we were much smaller um and the really bad one which was that that was an Arbitrage position in Japanese index link bonds inflation link

16:24 bonds now this Arbitrage was perfect um jgbs Japanese government bonds full faith in credit um uh against jgbs that had the as I recall the um the principal amount adjusted for actual CPI uh uh movements the Japanese CPI Consumer Price Index um never moved much it it

16:55 was bouncing around zero for decades U Back Then we're talking about 20078 2006 78 um be hardly ever dipped tiny bit below zero for a month or something but it was running plus a little okay when we got involved in that horrible trade a dealer showed it to us and the dealer had several other people um in the trade um the price

17:30 was minus 2% inflation per year for 7 years minus 2% it's the kind of thing where you look around the trading room and ship it in right okay so to make a long story short a long painful story short that thing went from and implied in the prices um minus 2% per year at the worst minus 4 and a

18:01 half% per year to to make this very very uh straightforward in terms of arithmetic the jgb uh I the inflation Linker went down 30% in price MH that that trip to where we still held it we lost Gob of money um and it was going to mature just six years or so in the

18:32 future but we had lost like 30% of the of the principle and it's these things are Mark to Market every day um so that calls to um CA to um action uh a different um um a different set of skills for money managers a number of people were sold out of that position because when you misunderstand the risk and lever something up that you never should have

19:03 levered up that way because you misunderstood the C the essential characteristic um you can have devastating losses we I I had a lot of pressure to onewind the trade but I kept the trade and it's just it was in ' 08 there were a lot of you know do or die positions back uh back then yeah tell me about about it I was there why is it so important for you not to lose money where does the risk

19:34 aversion come from it's a great question um Elliot was formed in 77 when I was accepted after college to Harvard Law School the greatest moment of my Dad's life um he was a retail pharmacist a chemist and he was sure I was going to be some really big shot and he was sure that I had to um learn how to invest

20:05 because I was going to be a financial Big Shot um I was a Psychology major in college and I had no idea why I was going to law school but Harvard Law School was sounds good might as well and I think my psychology background titilated the um admissions committee um and so the way my father and I dealt with my training was and retail pharmacist he's he's in the drugstore every day 12 hours a day we traded

20:34 speculative mining stocks and tech stocks and I promise you you could not name a way to lose money the dad and I did not hone to the finest uh uh Edge Short Selling long puts short calls uh I was an early adopter of uh the CBO uh CBOE um the options Exchange um and that culminated in a catastrophic

21:05 loss in the 74 bar Market um where I was long stocks that I was certain because of my intellect uh i' done the research um I certain they would go up and I held them on margin um at one point and I'm talking about $50,000 for my mom's special Dash in the bottom of the dress dresser draw drawers um uh at one point it was down

21:36 88% 88% um so um my desire never to lose money again was a combination of wanting to get my mother's my parents' money back um and and the feeling of uh real Devastation I mean losing B and my best friend's the $10,000 and $20,000 um so when we formed Elliot with when I realized that I could manage

22:06 money and make money all the time the convertible hedging was was a a very good strategy very under underserviced uh you know High standstill rate of return um no real no really good uh valuation models um it was all on the Fly and all relationships with the street and along the way so what I just said is not the full answer to your question along the way what I

22:39 observed was that when people have losses meaningful losses they tend to lose their minds they tend to lose their judgments their sloppiness in accepting the state of play of the world when the skies are blue um turns into a clutching darkness when uh when the headlines and the stories and the and their friends uh

23:09 uh are uh in trouble and suffering terrible losses and so I knew that judgment is impaired um I also knew that if you could keep your not only your head and your judgment intact but your Capital intact these rare periods of time when there are special opportunities I mean those last few weeks in ' 08 um unbelievable just they everything

23:41 got cheap and then they collapsed I mean serious go back and look at it go back and look at it so if you had the the the Constitutional as well as uh as well as um um ability by permission as well as the um Capital the exess capital um to take advantage of those uh opportunities that's a pretty cool thing to do so if you don't lose large amounts

24:13 of money so the capital is like a ratchet effect you make a buck you keep it you try to make another one my clients never held me to a benchmark obviously you have to make some money um um um the the Brilliance of our approach um uh uh is that we don't Benchmark ourselves it's it's what I just told you

24:43 it's don't lose money and whatever's left hopefully it's a rate of return it's interesting how formative it is if you lose money early on in your career I mean as Steven schwarzman talks about the same thing right how you lose I don't know his story your client's money early on and you just decide you're never going to do it again um you talked about your father are you still trying to make your father proud I appreciate he probably is not

25:08 alive anymore but you know he was proud of me no matter what to be perfectly candid about it um no I'm not doing it to make my father proud I U I keep doing it because it um I think we do it well and is it fun are you having fun no you're not having fun you don't think it's fun oh I don't think it's fun I think skiing is fun snowmobile dealing is great fun sailing is fun why do you

25:32 why do you are you 80 you're 80 but what and so if you don't think it's fun why why you're 8 years old why why you you've done it for 50 years you're one of the most successful people ever why why do you continue to do it if you don't think it's fun I get this question I get this question and the reason I basically this is a little different this format but the reason I basically

25:53 get this question is that I dig in I'm enthusiastic about it I get into it it can't be boring if you think about what you read about in the newspaper which is largely distorted pathetically um so wow they're doing all kinds of different things there's no cookie cutter thing at Elliot so there's challenges and sometimes it's it's uh you know we never have a a position profit celebration never you never

26:24 celebrate success no I mean we you know hey well done in an email but no cake no champagne no cake no champagne no no no no um but um what I what I want to say on this topic of fun is you can't get bored by not losing serious money um the reason for Burnout is sharply diminished you know that's what happens I mean it's not just

26:55 horrible divorce or terrible tragedy in the family it's you know burnout is you know I think largely um people just are drained of emotional energy by by adversity because and you can't predict markets so that's that's another a dominant uh cause of me seeking never to lose money because if I want to be risk averse I have to be risk averse all the time what does age and

27:26 experience bring to to your investment process in our lines of business if someone is not burnt out or bored or fading in terms of capacity the experience and wisdom is so so needed um the in today's world especially um the the layer of

27:56 understanding Beyond um the spreadsheet and the horrible lawyers telling you you have a 95% chance of winning that antitrust suit and then you lose and you get dark and hostile thoughts to all of your advisers um um so it's that I don't know I don't like this one why Paul why uh just don't like it

28:29 talking of which you also uh took on Argentina what what happened there Argentina somewhere in the late 90s um early oos um the debt started trading down um into the uh uh 80s and then 70s it was still paying um and many people thought that they would go U default and uh we didn't we didn't uh we knew that they

29:00 had a history of default um three four times in 150 years we also knew that they were coming out of World War II I think the seventh maybe the eighth largest economy in the world so you know lots of resources lots of capacity we didn't think it was a good idea and we didn't think they would uh default they defaulted and the bonds U and we bought performing bonds the bonds started collapsing um and it was a long time I I

29:32 don't remember the exact time it was a long time before they um um gave their first offer okay now Sovereign restructurings come in different flavors and I don't want to oversimplify but I think my categories are broadly right um there's a category of countries that um have nothing and you're not going to get anything and you're just being annoying by

30:04 um going after them so Argentina is a real country and after some period of time I think it was in years um an extraordinary an extraordinary period of time for a sovereign restructuring they came in with a 29 Cent deal well maybe it was 30 30 cents now a 30 Cent recovery deal for Sovereign restructuring is a number that might be appropriate for a

30:37 Guatemala or a Honduras or something Ecuador I don't know but Argentina um 25% of the holders and the the bonds kept the debt kept plunging uh 25% of the holders held out the country said um if you don't um if you don't um uh accept this offer you get nothing so they got a few perc more in a second try

31:07 at the the same offer like three years later um at the end of the those two offers there were like 60,000 Bond holders including like five hedge funds of which Elliot was the largest and by that time our basis was down down into the I don't know teens or 20s whatever 30s I don't know um um it it had kept trading down and down and down um uh and

31:39 it was just in litigation for how long time did this take this thing take you 15 years 15 years well that's pretty um that's pretty patient I would argue no it's not patient I tell you why they never accepted our offer to negotiate with them they never put a deal on the table um uh never sat down with us um they were they were an

32:12 example and there have been some in the corporate area um they were an example of just stubborn um Hoy um entitled I mean the nerve of us no but I love the fact that you don't think he's patient because I'm 58 I make an investment I hope I'm going to get return before I'm 73 yeah but we weren't patient we had no place to go patience is not patience is not sitting you know metaphorically speaking

32:44 Shackled to no no sure absolutely absolutely what are the state of stock markets today just about as risky as I've ever seen I think um the long period of time um since the last major Market event has led people into thinking that they'll always be bailed out that there'll never be another uh bare Market you know of a

33:14 1974 1987 um 2008 20078 um and uh Leverage is uh building and building um risk-taking is building and that those statements uh apply also to um um to governments it's absolutely astonishing this this nerp the negative interest rate policy in uh Europe and

33:45 Japan and Switzerland um um and zerp for U uh what 10 years in the US it's crazy it's crazy and in pandemic you added to zerp you added these shockingly high spending deficits we're talking about deep recession type spending programs spending deficits support programs um at a time when there

34:17 was no no real recession MH I'm talking about I'm actually talking about during covid also but after covid um you know this year this fiscal year over 6% uh in the US 6% um of GDP uh deficits so I think there's and and valuations this this AI is way over its skis in terms of uh um practical um value um um being

34:52 brought to users I mean it the there are uses and there will be additional uses but it's it's way exaggerated how do you read the crypto markets a point that we have recently made is that um it is true that central bank money is conjured out of thin air doesn't exist but what also is true about central bank money is that it is

35:23 Sovereign it has Sovereign support it's you pay the tax you you pay your army um in that money um to the extent that governments Embrace cryptos this crypto or that crypto or all the cryptos or several of the cryptos they are embracing alternatives to Sovereign money so what are and therefore and

35:55 therefore is the money Supply going Hog Wild now because of all these cryptos and all of the support of governments so what are the potential implications for the the dollar as the world's Reserve currency that's the point if governments are supporting or endorsing cryptos it's an alternative to the dollar as the reserve currency and countries around the world are uh as you know um uh not happy with the privilege

36:29 that the uh US Government um uh asserts as the central bank as the reserve currency country of the world they'd like Alternatives Now isn't that interesting they they'd like Alternatives the dollar sits there arride the world uh with all the abuses of that asess okay and the US itself is uh is um Conjuring or supporting an alternative to the dollar

37:03 it makes my head spin how do you relax skiing snowmobiling sailing hiking biking music why is music important for you I like rock music and I have a couple of bands so you play in the bands mhm keyboards proper like proper rock and

37:34 roll yes you mean it's distinguished from hip-hop no I'm just asking you it's distinguished from from Lonnie donagan or yes proper rock and roll cool what do you read I I used to read science fiction but I mostly read um trade um books research it's that's kind of um it's kind of overwhelming at this

38:05 point given how complex markets are it's uh so I don't have time to read fiction anymore what is your advice to young people young people who are interested in Wall Street or young people in general or young people who would like to go into business my advice to those people has been and is um um unchanged uh over a long period of time

38:38 um that I value a broad classic liberal education um they should not take business courses in college they should take as much history political science philosophy religion um uh as they can fit in so what I'm what I try to convey is you can specialize in business the tools of business and trading I mean now hedge

39:11 funds private Equity Venture Capital you know Hightech whatever I mean that's the the Golden Goose but um in all of that um what comes out if you if you specialize uh uh too U too soon you get you get this narrow deep skill set and you're not equipped for the things that are actually happening in the world and so um I think um I think that stood me in good stead and being a lawyer has stood me in uh good stad although my my

39:44 partner is is not a lawyer he thinks like a lawyer which is good well Paul I think these are great pieces of advice um stud liberat broaden out don't lose money and keep rocking and until you're 80 no not till you're 80 till you can't do it anymore it's been a great pleasure thank you thank you