埃杰顿资本创始人约翰·阿米蒂奇：什么样的公司才值得投资？

John Armitage: If you use AI too much, your brain is going to rot. And it's quite simple. People who don't do mental arithmetic lose the ability to do it. It's just simple. So, we want AI to help us and to short circuit things, but we don't want it to think for us.

Nicolai Tangen: Hi everybody. John Armitage has been the most important person for my professional development. I traveled with him for several years when he was my largest client back when I was an analyst and then I worked for him for 5 years at Egerton Capital. Nobody has taught me as much about investing in markets as John has. So John, it's an honor and long overdue to have you here. It's going to be kind of a master class. How to look at a company, how to build a position, and how to run a firm for 30 years without losing your edge. John, welcome.

John Armitage: Thank you very much, and it's a great honor to be here.

Nicolai Tangen: Let's start with the basics. What is a good company?

John Armitage: Well, you know, I think first of all, obviously, there's a difference between a good company and a good investment. And second and I would say look many things go into a something being a good company and today a lot of people talk about moats. Moats are critically important but at the same time if you have a moat without the right management you get destroyed and look at Boeing under its previous CEO. Look at Rolls-Royce before the brilliant new chief executive who's running it.

Nicolai Tangen: Rolls-Royce had a moat but somehow as he put it, it was a burning platform.

John Armitage: I would also say that if you think about the theoretical value of a company, it's the value of the future cash flows. Therefore, how those future cash flows are invested is important. So, one of the things that's important is capital allocation.

Nicolai Tangen: And if you think what Berkshire Hathaway originally was, it was a New England textile mill which got closed and look what it turned into. And that's because of capital allocation and culture. And I think culture is critically important in a company. And look at the way Intel lost its way for such a long period

John Armitage: and that was because they didn't dare to innovate. They didn't dare to enter new fields and there was a business with incredible market shares getting eroded. So I think culture, capital allocation and moats are all very important.

Nicolai Tangen: What are the what's the first thing you look at? So here here I give you okay this is a company this is a new idea. What is kind of the first thing you look at?

John Armitage: Well, the first thing I look at is is it worth the time?

Nicolai Tangen: How do you how do you decide?

John Armitage: Well, many businesses are fairly priced. There's no point in spending a lot of time on something which is fairly priced. What is the point?

John Armitage: And the second thing I think about is, you know, can I understand it? Will I understand it? I once had a very interesting meeting with the CFO of a drug company and I asked him how they were able to assess whether a phase 3 clinical trial would be successful or not. And he said, "Look, we can't assess it. We just think of them as a series of options." And I sort of thought to myself, well, look, if you're the CFO of one of the largest drug companies in the world and you don't know whether a phase three trial is going to be successful, how the hell am I going to?

Nicolai Tangen: So, what are the type of companies you can understand?

John Armitage: Well, we try to understand as many types of companies as is possible and where look to I'm not a physicist I can't write code but I'd like to try and feel that I can understand why Nvidia might be successful and what's very important for us is to understand the inherent operating leverage in a business by which I mean what is it that will make it massively out or underperform expectations.

John Armitage: And if you can't grasp that, you're on I think you're on a hiding to nothing. How many great companies are there? Probably more than you think. And we own some of them. And there's a lot we don't own and haven't owned. But the nature of great companies changes over time. Look, Coca-Cola is a great company and there isn't a substitute for Coke, but the fact is it's probably underperformed the market in the last 25 years. And why is that? Because they haven't come up with the new Coke.

Nicolai Tangen: Well, when they did, it didn't quite work, did it?

John Armitage: That's true.

Nicolai Tangen: One of the things that you taught me was the importance of pricing power. Why is pricing power important?

John Armitage: What is it first of all? Well, pricing power is the ability to have a product whose price you can raise despite competition. And why is it important? Because all companies face cost inflation. Because the world is more competitive for companies today than it was before. Because trade barriers are lower. Because technology is something which opens up competition. And if you can sustain your pricing power, it is a sign that you have something truly marvelous about your business. And because if you can price more than your cost inflation, you're going to structurally achieve margin growth.

Nicolai Tangen: Mhm. And how does cyclicality come into play here?

John Armitage: Well, we are not a style defined firm. In some ways I wish we were because I think if you're style defined, you probably have greater staying power than if you're not. I.e. clients like investing in defined styles. So we do invest in cycles and it's very important to get those right because if you invest with a cyclical company it's often you often feel the best before a downturn. So cycles are important particularly if you're like us and you try to sort of traffic in whatever is doing well.

Nicolai Tangen: Are you sure you haven't got a stylist at the firm?

John Armitage: I mean I think we have a style which is to do with investing in I like to define it. I like to invest in a company where if the stock market closed I wouldn't feel worried that is some sort of style and I like to invest in a company where I feel I have valuation protection on the downside and I like to invest with management which are realistic and I hate to invest with management which use accounting policies to make their results seem better than they in practice are and I hate to invest with management where you feel they have a sort of where life is always rosy.

Nicolai Tangen: What are the type of industries you would never touch?

John Armitage: We're not very big on drugs and otherwise in my time I've invested in most things ranging from a metals company located in the forbidden zone of Russia to oil and gas to oil services to technology to retail. But I think today some industries are more exposed to competition than others. And that's because of the impact of technology.

Nicolai Tangen: Do you think you have to have a world view to be a good investor?

John Armitage: I think you have to have a view about economic conditions, but I don't think it has to be more sophisticated than is this a time when companies are swimming upstream against the current as opposed to downstream with the current? Unless you are trying to be a macro investor and that's not what we can do and it's not what we would do and I would leave that to geniuses like Stanley Druckenmiller.

Nicolai Tangen: What is your worldview now?

John Armitage: My world view is look markets are high, interest bond yields are high in the US. We've got two wars. The oil prices up and the markets are odd. The markets are high. It's strange. How do you read it? How I read it is that if we didn't have the stimulus of AI-driven growth and if we didn't have strong earnings in the US, the world would be in a different place.

Nicolai Tangen: Now, you didn't study finance, you studied modern history. How does that shape your way of looking at the world, do you think?

John Armitage: Well, I don't think it necessarily shapes my way of looking at companies, although I do think history is about investigating things and you have quite a sort of good training at doing that if you do it properly. I happen to think that I've never found it easy to tell whether a good investor benefited or not from reading business studies. You know, I know you have an MBA from Wharton.

Nicolai Tangen: No, undergrad.

John Armitage: but I know plenty of people who have MBAs and I know plenty of people who read art subjects and you wouldn't know it from the way they invest and I personally believe

Nicolai Tangen: Do you hire MBAs?

John Armitage: Yes, but I never really look at it. We have hired MBAs. My father when I was young told me that universities were about education rather than being a technical school and you should focus on that and that's what I believe in.

Nicolai Tangen: Um so now you have a company here so you are really into modeling right I mean you believe in your into modeling

John Armitage: and I think although there's a lot of very good work from the sell side concentrated in individual firms and a lot of very good work I think you know too many of the sort of leading analysts. The models are for juniors and I think there is a fine art to modeling which is about the right sort of detail but not too much of it.

Nicolai Tangen: Tell me about it.

John Armitage: Well, you know, if you have too much detail, garbage in, garbage out. Too much detail, minor changes of assumptions, everything goes haywire. You know, when you're forecasting how a company will do, you need to be able to isolate what are the absolute key factors and focus on them.

Nicolai Tangen: Okay, let's apply a qualitative lens to that. Okay, let's model a company. How do you what goes into the top line?

John Armitage: Well, I mean, if we talk about a company like Airbus, which we have a big holding in there, it's very simple, isn't it? It's the number of planes you sell times the price. You don't know what the price is cuz it's all contractial. So the way you have to think about Airbus is what might the incremental margins be on each unit? How will those develop? When will pricing trends in the order backlog manifest themselves in revenues? What about the big lumpy cost items that they can forecast like R&D and that they do forecast? And how will FX work? And the answer is with a company like Airbus, a lot of the information is simply private. You have no way of knowing what the price on an order is. So how do you model it?

John Armitage: You try to piece together inferences from what they've told you. And if you take a reinsurance company and we had big holdings in reinsurance companies, reinsurance contracts are private between the insurer and the reinsurer. You have absolutely no evidence about a contract and about the level at which losses kick in and about how the losses are divided. And again, you sort of have to take their word on it. And then you have to look at how their reserves have developed over time because how their reserves have developed over time tells you how they've estimated losses in the past. And one of the things about insurance is that good companies tend to do better and bad companies tend to do worse. So, in general much about companies is private and you have to use inferences from companies to apply them to numerical output. Look if you take Nvidia one of the big issues about Nvidia is memory cost inflation and what it does to their bill of materials because Nvidia makes 75% gross margins. Now they've as it happens they've just guided to gross margins in the near term but you kind of have to piece together what the composition of their bill of materials is how memory price contracts have worked when they will impact and then try to work out the sensitivity of what what would further spike in memory costs inflation due to them.

John Armitage: You know there is a lot in companies which is very private but then there are some companies like we happen to own Visa where they make 67% margins you kind of know roughly what drives the top line and the costs are pretty clear and you know mixed effects are a lot less relevant. So, I'd say modeling a company, the skills involved range from being quite sort of numerical to applying a sort of detective overlay to what you're told and drawing inferences from what you're told and thinking about it and stress testing it as much as you can.

Nicolai Tangen: One of the points at the profit and loss statement which you taught me to focus in a lot on was the margin at the margin the incremental

John Armitage: incremental margins. Incremental margin.

Nicolai Tangen: Why is that so important?

John Armitage: Because if companies have sales overshoots or undershoots, a very high incremental margin relative to a lower stated margin can cause a big profit beat or a big profit loss.

Nicolai Tangen: So, should it be high or low? Well, you want high incremental margins, but you also want to start with high margins.

John Armitage: Depends what you're shooting for. If you think you found a recovery story, which no one else has found, you want massively high incremental margins because no one really kind of factors in the benefits of what a really good incremental margin can be. People don't really dare to do that.

Nicolai Tangen: So that's why Nvidia is so good because they sell a few of things and bang profits.

John Armitage: But Nvidia has a very high margin to start with.

Nicolai Tangen: Yeah. Yeah. What are the other things you particularly look at down the profit and loss account?

John Armitage: I look at accounting policies. I look at depreciation rates. But you know once you've got to the EBIT profit the operating profit everything else is pretty simple.

Nicolai Tangen: What about cash flow?

John Armitage: Very important. You know what's the point of profitless prosperity? What about balance sheets? Very important. And someone I know who's a finance director once said to me that accrual accounting which is the way standard profit and loss accounting works is a balance sheet output and I think that's correct. And so you can't disaggregate balance sheet moves from P&L moves and you have to focus on them.

Nicolai Tangen: So now here is a balance sheet. What do you look at? What are the kind of things?

John Armitage: You look at what's happened to the inventories because that will impact revenues they've recognized and costs they've put on the balance sheet. You look at and then you look at their terms of trade, how their payables are doing, how their receivables are and you look at whether the cash has gone up and then you look at artificial measures they could have taken to boost cash like factoring receivables. You look at all kinds of things.

Nicolai Tangen: Now you talked about clients. So one of the things you taught me was that it's important to have many clients so that one client is not too important and then that your sales you shouldn't sell everything in one month. So for instance running a ski lift

John Armitage: That's true.

Nicolai Tangen: you know like a ski lift is not a very good idea because you don't control the snow and

John Armitage: depends whether it's monopoly or not. [laughter]

Nicolai Tangen: Do you like monopolies and market power? How do you look at these things?

John Armitage: Well, I think monopolies are generally good if they've been honestly produced, you know, and I think market power is a very nice thing to have if it's been honestly achieved.

Nicolai Tangen: Yeah, for sure.

Nicolai Tangen: Um, you talked about management. And you mentioned some which were outstanding and really really important. Just how do you judge management?

John Armitage: Well, you know, one of the things I pay a lot of attention to is do managements admit their mistakes? And one of the most outstanding executives in the world is Michael O'Leary.

Nicolai Tangen: For the listener, Ryanair CEO.

John Armitage: Yeah. And if you listen to Michael O'Leary, sometimes you'd think he just hadn't created the world's most profitable airline, but he just made a series of mistakes. And here is someone with an incredible focus on detail. He's quite relentless.

Nicolai Tangen: Also very funny.

John Armitage: Also very funny. He has a team of really super people around him and he's highly aware of what he does right and wrong. When you know Pat Gelsinger came into Intel, one of the first things he did was change their accounting so that stock-based comp was added back to earnings. And you kind of think, you know, like really, what does that tell you? So stock-based comp is not part of compensation. It's not a cost. Like really, is that realism or not? I look for management which is realistic and grounded and can see that things aren't always rosy. What are the red flags? Consistently missing expectations. And that feeling that someone is always presenting a picture which is slightly biased to be positive.

Nicolai Tangen: That feeling that people don't like or can't admit something might be wrong.

John Armitage: and it's an intuitive thing that

Nicolai Tangen: Yeah. But isn't that also a geographical thing about it?

John Armitage: Not always. You know, one of the best sales I ever did was of a company called Altice and that was run by a very compelling person who was brilliant at cutting costs. It was a French cable company and then it became a telecom company. They used a lot of leverage and the model really worked. The model was not much growth in the top line but a lot of cost cuts a lot of leverage acquisitions and I remember there was one quarter when the numbers came in just slightly light and I'm always quite suspicious when companies don't have much topline growth because I think if they don't have much topline growth what's the room for a mistake and I remember I just didn't really like the fact there was just a very slight miss. It had nothing to it didn't really affect the medium-term numbers the way we model them, but I just decided we should sell it. And so, we did sell it. And I was just a bit suspicious of the model. What did you base the decision on? I based the decision on the fact that I thought the business model didn't have much room for something to go wrong. And that's very important. What's the benefit of a high margin? The benefit of a high margin is that if you have a sales shortfall, your P&L isn't shot to pieces.

Nicolai Tangen: Do you think there's a risk of getting too close to managements?

John Armitage: Yes, I do. And my partner Ralph calls it paralysis by analysis. And I think it's a bigger risk today than it used to be.

Nicolai Tangen: Why?

John Armitage: Because today information has proliferated around the world. You know, think of the number of analysts who write on a stock. Anytime any company executive speaks anywhere in the world, there will be people listening to him and reacting to it. So you get deluged by information. And one of the difficult things about investing today is on the one hand you always have to cover the basis. It's a bit like panning for gold. You just never know. And you have to cover the basis. You have to listen and be aware because there might be something valuable in it. And also because other people are and if you're not and someone else is and they decide something's going wrong, you're screwed if you haven't realized. So one of the big differences from when I was young is you have to absorb so much more. The problem with absorbing so much more is it just gets imprinted on your brain and it can be difficult to get away from it. And so we do sometimes suffer from this phenomenon of paralysis by analysis.

Nicolai Tangen: How important is valuations?

John Armitage: Well valuations really important to me and it's probably been too important in my career because I've probably missed lots of great growth stocks. But I like owning things where there is some valuation support on a conventional basis. And I hate with a passion EV to EBITDA valuations. I think they're meaningless.

Nicolai Tangen: When you say conventional, what are the type of metrics you look at?

John Armitage: PEs, free cash flow multiples, EV to EBIT maybe, but EV to EBITDA, you know, you get these companies today valued on EBITDA and the biggest cost they have is depreciation. Yeah, that really makes sense.

Nicolai Tangen: Tell me about PE. What's high, what's low?

John Armitage: Well, when I was young, 20 times was high. I guess now it depends on the growth rate. I tend to think of if I can buy a fast growing company on a multiple next year of

Nicolai Tangen: PE, by the way, is a price divided by earnings. So, it's kind of how many years it would take for a company to make its own share price in earnings.

John Armitage: I have less comfort than some people for high earnings multiples. And someone I have a huge amount of respect for who I think's got the most incredibly powerful intellect thinks GE is a cheap valuation. To me, it's a bit rich, 35 times earnings. I feel like if you can buy a good company with decent double digit growth near 30 times next year, that's attractive in today's environment.

Nicolai Tangen: Some people start by spending a lot of time on valuation and then end up spending less time on it like Warren Buffett for instance more into high quality stocks than they were earlier on. Have you had that?

John Armitage: I feel the issue with that is that you can get too attached to the quality and not notice something's underperforming and he has the luxury of permanent capital and we have weekly redemptions.

Nicolai Tangen: Would you have thought differently about it if you had permanent capital?

John Armitage: I've never thought about permanent capital. I don't particularly want it. I think the risk with permanent capital and lockups is that they're a trap. The risk is you say to yourself, "Well, I've had a really bad 6 months. This stock's collapsed, but I really like it. It'll work itself out over the two or three year periods. My investors have got to stick with me." And then you realize it won't. And you allow permanent capital to be a luxury. Permanent capital, or long lockups, they become a luxury which removes the tension of needing to grapple with proper investment decisions. I worry it would make me relax and be complacent.

Nicolai Tangen: Well, because you can't be complacent in the stock market.

John Armitage: Yes.

Nicolai Tangen: You were dismissive of EV/EBITDA, which is a different way of looking at valuations. Just why are you dismissive about that?

John Armitage: Because depreciation and amortization is a cost. Why should you add that back? It's a real cost. Companies need to replace their capital. And then you get serial acquirers which always have some amortization. And quite often serial acquirers put more costs into intangible assets than they should. And the amortization of those costs is added back to EBITDA. Why would you do that?

Nicolai Tangen: Let's move on to good ideas. Where do good ideas come from?

John Armitage: Well, they come from all the people around me and they come from look the stock markets yield lots of profits for people. Therefore, there are lots of people who are incentivized to give you good ideas and I think you have to be eclectic about where you get those ideas from. And I have a lot of very clever partners. I read lots of research. I troll through what is produced by the major investment banks to decide whether I think something looks interesting and ideas sort of dawn on me over time.

Nicolai Tangen: Do you find good ideas from the sell side?

John Armitage: Yeah, often and in pockets some outstanding research.

Nicolai Tangen: And who are the investors you talk to?

John Armitage: I'm not one of these people who's always on the phone and I'm not a sort of particular networker, but there are some people I deeply admire and like catching up with a few times a year. Chris Hohn's got an amazingly powerful intellect. I really like some friends in New York like my friends at Lone Pine, like Mala Gaonkar at SurgoCap, like Eric Mandelblatt at Soroban. The world is full of clever people but I feel like the New York investment community is quite kind of incestuous and they talk to each other all the time and I'm not really like that. I would be a bit embarrassed ringing people up to ask them what they thought about things.

Nicolai Tangen: So from that point of view, is London a bit of a backyard?

John Armitage: Well, London, I think the difficulty with being in London is that if the important things happen in America, there's a risk you are late and sometimes it's important to follow the fashion and sometimes it's important to be where the dominant economy is. Often it is. It would have been in 2007-2008 and we'd probably have done better if we had been there this year but equally you can get too close to things and have not enough detachment and you can be in too small a world.

Nicolai Tangen: Was London the center of the universe when you started?

John Armitage: Yes, it was and it is not now.

Nicolai Tangen: Now you are not employing data scientists. Tell me about it.

John Armitage: Well, I've never wanted to invest in companies where I was reliant on the latest channel check. And I think in any case, channel check results are a function of something else which is more powerful, which is the business itself. And I'd rather try and understand that. And I'm a skeptic about opinion polls. But the world has moved on and we do have some data scientists, technologists today who are helping us get to grips with AI and AI as a tool for our investment process.

Nicolai Tangen: How does AI change the art of investment?

John Armitage: I think AI changes a lot. I'm not sure whether it's a good thing, but I think it changes a lot. If you're in the business that we're in as opposed to the Jane Street Capital business or Citadel and Millennium business, what does AI give you? It gives you instant access to knowledge which can be formatted any way you want. So you get conclusions. I do think there are two risks with that. One is that if people ask the same questions, are they going to get the same answers? Is it going to turn out there's a single source of truth? And the second thing I worry about personally and for all our people is that if you use AI too much, your brain is going to rot. And it's quite simple. People who don't do mental arithmetic lose the ability to do it. It's just simple. So we want AI to help us and to short circuit things, but we don't want it to think for us.

Nicolai Tangen: Is it going to make market more efficient? Is it making markets efficient?

John Armitage: I think markets are infinitely more efficient than they were when I was young. And clearly AI will speed things up. And I don't think anyone knows the extent to which do large language models and the answers they give train on like search results. Google will surface answers based on the questions that have been asked. If more people ask a question on Google, it's more likely to surface the same answer to me. Is that true of AI? Will it produce a herd effect? I don't think anyone knows. If it produces a herd effect, then maybe you'll have an opportunity to get away from the herd.

Nicolai Tangen: Do you think alpha is a thing of the past?

John Armitage: I think it's definitely much harder.

Nicolai Tangen: And what are the implications for people like you and some of your fans?

John Armitage: Well, less good.

Nicolai Tangen: Okay. How do you get alpha today?

John Armitage: You can get alpha today by being highly highly concentrated both in single stocks and thematically. I think very few people are capable of doing that. The professional buyers of investment products, they love concentrated portfolios because they run lots of funds. So they like concentration and I don't think they really understand that concentration is just marvelous when it goes right but when it goes wrong boy it's a disaster. So I don't want to go the route of just putting everything on red.

Nicolai Tangen: In this world where there is more momentum there is more AI and so on just how do you keep this sense of intrinsic value and sticking to your guns?

John Armitage: Numbers are numbers and earlier this year well we're having a pretty poor year this year and there was a time when I really felt like my god maybe I should jump off a cliff and

Nicolai Tangen: but you take that from time to time

John Armitage: and I came to realize that fine we'd missed a humongous great trade what was important for us was did we think the numbers that underpinned our investments were valid and if they were valid would we make money and so we stuck to that and that was bloody lucky because if we'd chased the crowd at the time I was most depressed it would have been a disaster.

Nicolai Tangen: What kind of situation are you talking about now?

John Armitage: Well I mean there was a time when you couldn't give away Visa and luckily it's up 20% since then and that's true of other stocks when many of the real high-flyers dropped a lot. And so, you know, I feel like you have to be true to yourself and work out are the valuation numbers that underpin your position, are they valid? Will they work out? And if they do, is the position attractive? And you have to just stick to that.

Nicolai Tangen: In you've been through most type of market situations in your professional life. In what type of markets are you doing the best?

John Armitage: Trending markets and trending stocks. We're very bad at violent movements. Violent movements tend to be emotional. They tend to often presage a big change in the environment. They tend to be caused by geopolitics or big economic shifts. And if you're stock pickers like we are or like we try to be, what resonates with you are the numbers in your spreadsheet. What resonates with you is the conversation you had with that company a few weeks ago and you think to yourself, it can't have changed that much. And so you can be far too late to realize there's a change. And when I think back to 2008, you know, I think we were handicapped then by sitting in London because sitting in London when people told me that US house prices had gone up a lot and they compounded at 7% per annum, I thought, well, that's quite low and I didn't really have a clue about how the linkages would work into the broader economy. And I think that is the danger of being a stock picker. You can be too focused on the individual investment and not really realize that it's part of a jigsaw in the economy and it depends on lots of things. And if you take one of the legs of the stool away, it can fall to the floor.

Nicolai Tangen: When you have these volatile markets, how do you cope with stress?

John Armitage: Presently, I wake up every morning wondering whether I'll ever be successful again. [laughter] And that's the truth. And my wife and I have this discussion, God, is it all over. [laughter] That is the truth. And I walk around the office feeling a bit black. And then I try and count my blessings because I'm very fortunate. I've lived in a great time and when my father's generation were young life was all a bit worse.

Nicolai Tangen: Now when I did my master's degree in social psychology, I interviewed you to talk about pattern recognition. Remind us just when do you use pattern recognition and when do you use analysis and just how do you switch between the two?

John Armitage: Well, first of all, when you talk about pattern recognition, I feel a bit like the character in Moliere who was told he was speaking prose and he didn't know it.

Nicolai Tangen: But we call it feel.

John Armitage: When we don't understand something which has on the face of it had a minor impact on earnings we're reasonably quick to pull the trigger. We had a long-term holding in a company called Fiserv and it was a very good investment for us. They had some results which weren't quite what we thought they were. We didn't understand it and we sold the position and subsequently you know it was one of the names which did go down a lot. It was the same with Altice.

Nicolai Tangen: But these are pattern recognitions, right?

John Armitage: Yes. So those would be two examples.

Nicolai Tangen: So you don't like disappointments?

John Armitage: I don't like disappointments and if there's a disappointment I always tend to cut the position back a bit because people say disappointments don't come in ones but also because I like confirmation of a thesis rather than contradiction.

Nicolai Tangen: So when people do a bit better do you buy often? You have an incredible ability to not think about where the share price was.

John Armitage: Well, you have to because nearly every good investment you ever make has gone up a huge amount. And the stock doesn't know you're trading in it.

Nicolai Tangen: How do you build a position then?

John Armitage: Well, we start slowly.

Nicolai Tangen: When you say slowly, you mean small or you

John Armitage: We start small and then we try and do a lot of work.

Nicolai Tangen: How quickly do you put on a position? How quickly can you put on a position?

John Armitage: Well, it takes time for it to get big. But obviously we can put a position on very quickly. And what typically happens is either I will suggest something or one of my partners will. And if they do, I have the Sisyphean task of trying to keep up with them. So one of my partners will suggest something and I will spend the weekend working on it. And then there is a process of working out the thesis. I ask questions, get answers, ask more questions all the time with the company. We build up a model. We think about it. We interrogate each other and if we generate greater conviction we add.

Nicolai Tangen: How long time does it take?

John Armitage: It can really vary, I couldn't say.

Nicolai Tangen: It's interesting a lot of very good investors start small to kind of create that

John Armitage: I think that's an easy way to do it because the other thing is a new investment has to displace an old one, and it's just psychologically very difficult to tear up an intellectual presupposition. You know, you own this company, it's done well for you. It's harder than it should be to substitute something else for it.

Nicolai Tangen: Has Egerton changed a lot since you started it roughly 30 years ago?

John Armitage: Well, thanks to Jeff, our CEO, we're much better run. Not that we were badly run. We didn't have to be a modern business when you were in it. Now you do have to be. There are all kinds of regulatory demands on you.

Nicolai Tangen: But in terms of the investment philosophy, is it the same philosophy?

John Armitage: Yes, it is the same philosophy. Yeah.

Nicolai Tangen: Do you have the same focus? I remember talking on focus. So, when I had the pleasure of working for you, we moved into new fancy offices. You had never visited the office. And when you came into the morning, you didn't even walk around the office. You went straight into your cubicle and started to invest.

Nicolai Tangen: I thought that was pretty pretty good focus

John Armitage: or weird. I have quite a lot of focus. I mean, what I will tell you is I'm not on the management committee. I have never been on the management committee. I do not read the minutes. And the other day there was an internal presentation on something which I listen to. And I said to one of my partners, look, why weren't you there? And she said, oh, I wasn't invited. So, I said to someone else, why wasn't Yolena in the presentation? and this guy said, "Well, it was the management committee and you." And I didn't know who was on the management committee. So, luckily I don't have to do any of that.

Nicolai Tangen: Is experience an advantage in today's investing world?

John Armitage: I'm not sure. Sometimes I think you have to be young and naive to embrace visions. And I do think that as you get older, you get more conservative. And in my case, that could be for two reasons. It could be the fact that if other people know more you have to know more and it could be a feeling that when I started investing inflation was coming down, interest rates were coming down, we had the fall of the Berlin wall, we had 40 years of peace when we thought free markets would win. And what's happened now? Economies have maxed out. Corporates have done a lot to raise their earnings. We have two wars and the West is under threat, and so maybe I am more cautious as a result of it.

Nicolai Tangen: Just a few words on how you construct a portfolio. How many stocks do you hold?

John Armitage: Well, we hold about 40 and the biggest positions tend to be sort of 6 to 8 percent and I like having small positions which can grow if we like them. I like being thematically diversified which is very unfashionable today because professional buyers of independent funds value concentration. I don't think they know what can happen when concentration goes wrong and I don't really like financial leverage or portfolio leverage because longs and shorts can both go against you at once.

Nicolai Tangen: So how do you read the AI concentration in the market just now?

John Armitage: I don't like it but it's very powerful.

Nicolai Tangen: Are you participating?

John Armitage: Yes, we are. We own Nvidia and a brilliant company which supplies into it Amphenol. We own ASML. We own two hyperscalers and so many things in the US economy are keyed off AI that inevitably every portfolio will have more of it than they think.

Nicolai Tangen: Historically you were mainly a hedge fund. Now you're a bigger long only. Why? Do you think long only is easier?

John Armitage: I had a view after the global financial crisis that we would end up by being too conservative and that we wouldn't make the most possible returns for our clients. And therefore I wanted our clients to have a mixture of long only and long short. And that's been correct. And in the long run, if you think that markets go up, not paying a performance fee should help, particularly if you're a fund which doesn't go leverage long.

Nicolai Tangen: Why is shorting so difficult?

John Armitage: Well, most stocks go up over time. It's been less difficult recently since interest rates went up, but for a very long period when interest rates were low everything floated up and in periods of euphoria people believe all kinds of things and in periods of euphoria any company can raise capital.

Nicolai Tangen: Now, when you started back in '94, you were fund number two in Europe, I think.

John Armitage: One of the very early, yeah, we were. And in a way, it was a good time and in a way it was a bad time to start. Well, it was a bad time because our first opening we raised the equivalent of 1.25 million euros, which was not a lot of money. And it was a good time because there weren't many people doing it. And somehow we had a good start and there were just fewer funds. Today how many funds are there all doing the same thing? Loads and loads. How do you differentiate and how do you raise enough money to be viable and to get attention when costs are higher? It's a bigger risk.

Nicolai Tangen: How did you come up with the idea? I mean, you were very successful at Morgan Grenfell.

John Armitage: Well, I'd been very lucky at Morgan Grenfell and having worked for a brilliant and amazing guy called Mike Dobson who helped me a lot in ways which you probably didn't even realize. And then I'd been given a mutual fund to run. And that was a huge break for me because it meant that I had an independent track record which was totally my own. And I ran it for six years. It beat the index 10% a year. It was the number one out of 85 funds over its period. And that gave me the confidence that trying to go on my own would be a viable thing. And then I met a very good man who I thought would be highly complimentary to what I did, Bill Bollinger. And that I felt would get us off to a good start.

Nicolai Tangen: Well, for sure it did. Now, you call Egerton a benevolent autocracy. What does that mean?

John Armitage: That means that two people must love a position for it to be large. And that if I don't love it, it won't be large. Two people must endorse something for it to be of significance. It doesn't mean that I have anything to do with the management of the company, which I don't.

Nicolai Tangen: What's the one thing about you that most people don't know?

John Armitage: Well, as I'm not really a public figure, a hell of a lot, I'd have thought. But I suppose a new thing in my life which I've rather enjoyed is sponsoring the publication of nice books and I've been lucky enough to come into contact with a wonderful academic and a wonderful book designer and a new book is about to come out on Wordsworth's manuscripts. So, I like private press books.

Nicolai Tangen: How do you relax? Reading those books, I guess.

John Armitage: How do I relax? My wife would say I never relaxed. But I mean, I do the usual things. I walk. I talk to friends. I find people interesting. I go on holiday, sit by the sea, and work. I find it relaxing to be in control of my work and to be working on interesting things. And if I was just leaving behind 300 emails a day and lots of stuff which I had to do when I came back, I wouldn't find that relaxing. And I like reading.

Nicolai Tangen: What keep you going?

John Armitage: Well, I feel today that you are younger at my age than you used to be. A, I've got nothing else to do and no value to bring to anything else. I would get bored if I stopped and went to a bookshop every day. I'd get bored with doing the same thing every day. The markets are interesting. You feel like you never achieve enough. When you're doing badly, you feel like you can't go out on the low. And when you do well, it's kind of too much fun. And I really like the people around me in our firm. I really like my partners and I really like everyone who works there.

Nicolai Tangen: What is your advice to young people?

John Armitage: Well, my advice to young people: first of all, I would say study what you like because you'll be good at it and you'll be better at it than if you study something you don't like. And in my opinion, there's absolutely no point in studying something on business. It's not going to help you. The second thing I'd say is nearly everything is more interesting than you think if you follow it closely. The third thing I'd say is there was an Old Etonian prime minister in the UK until a few years ago and what his career showed is that up till you're 21 you can get by by being very clever and therefore after that you actually have to work and I think to succeed in life in your career you need a lot of luck being in the right place at the right time. You need enthusiasm and you need drive. Intelligence you need a modicum of intelligence but it's not like working at Anthropic. And you need to be happy in your personal life. I once met Scott Nuttall who runs KKR and we'd invested in it. The stock had done really well. And Scott came to our office and I said to him, "Look, Scott, thanks for KKR, but I don't want to ask you about that. What I want to ask you is how do I get to be like you, effortlessly successful at the top of KKR, looking 20 years younger?" And he said to me, "Marry well." And I have married well. And it's important to be happy in your life. If you're not happy in your personal life, you're not going to be happy at work.

Nicolai Tangen: You're not going to do well at work.

John Armitage: No.

Nicolai Tangen: John, it's been fantastic. I want to thank you first of all for hiring me, paying me well, treating me well, being such a tremendous gentleman, giving me advice to go to the Tavistock Institute, helping me set up AKO because without you, there would have been no AKO Capital, no AKO Foundation, and I would not have had this job. Well, big thank you.

John Armitage: You're very sweet, Nicolai, but it's all down to you.

Nicolai Tangen: Really hoped you liked the episode. If you did, please like it, subscribe, and put on the notification. This really helps us to get new great guests.