I want to thank Greg for sharing his knowledge with us today and Nikolai and NBIM for hosting us today and when I was offered the chance to discuss investment philosophy I said there's no way I'd rather spend my birthday.

I'm extremely interested in investment philosophy, uh I think it has to undergird everything we do, my argument is that our Behavior has to be uh well thought out and intentional uh and so our methodology has to be as well um and um uh you'll hear that it's different but at least we have thought it out and it is intentional.

um it starts with uh a conscious decision as to what you want to accomplish now this may sound easy well we want to have more money rather than less we want to have a higher return rather than less uh but the the starting question for any organization in investing should be will we will we settle for average or do we want to try to be above average.

now that sounds like an easy one but you have to recognize that investing it's extremely easy to be average you can buy off-the-shelf products that will guarantee you that you'll do average or you can try to be above average which is extremely difficult and there is no shorefire uh solution to how to get there and if you try to be above average it exposes you to the risk of being below average the two are inseparable so thoughtfully consciously intentionally which is it for you and your organization.

or you can try to be above average which is extremely difficult and there is no shorefire uh solution to how to get there and if you try to be above average it exposes you to the risk of being below average the two are inseparable so thoughtfully consciously intentionally which is it for you and your organization.

uh next um you I believe that an organization has to have a Creed a religion the things it believes in the things it doesn't believe in the things it will do the things it won't do because it doesn't trust them and you have to stick to it and uh again it has to be conscious and intentional now I wish the print was big so I could see it I uh I could probably see it if I do a little bit of this but um but the truth is we have to make decisions what will be our intention what do we believe in will we trust macro forecasting or will we uh abstain from it will we um pardon me uh uh how do you think about risk will you take a high risk approach or a low risk approach which is your rot rout uh to uh success it it's not the same for everybody um do you believe in the efficient market this is extremely important it's uh the most important concept I took away from my uh graduate uh education at the University of Chicago in the late 60s um uh many people understand the concept very few people incorporate it and think about it in their daily lives these are some of the things that we have to consider.

but the truth is we have to make decisions what will be our intention what do we believe in will we trust macro forecasting or will we uh abstain from it will we um pardon me uh uh how do you think about risk will you take a highrisk approach or a lowrisk approach which is your rot rout uh to uh success it it's not the same for everybody um do you believe in the efficient market this is extremely important it's uh the most important concept I took away from my uh graduate uh education at the University of Chicago in the late 60s um uh many people understand the concept very few people incorporate it and think about it in their daily lives these are some of the things that we have to consider.

so let's talk first about the concept of market efficiency now uh the the theory of market efficiency is that there are a lot of people out there and they're all numerate intelligent highly motivated objective and rational and they all want to accomplish the thing you do which is to end up with more money than you started with given the scope of competition how will you be the one who accomplishes the goal rather than them not easily uh thought out.

um now the the uh what we call the uh strong form of the efficient market hypothesis says that due to these circumstances all information is immediately incorporated into the price of assets to the extent that no one person can figure out uh which are the bargains and which are the overpricing.

now the the really strong form is actually a little different it says that the prices of assets as a result of this intensive uh process are always right you can't beat them and so you can't beat the market.

now I don't think that's right I think the prices are not necessarily right they're just the best that the consensus can do and it's hard for any one person to be smarter than the consensus consistently two different things but the um but the bottom line on both is the same you can't beat the market.

so the question is do you accept that and that that pushes you toward a passive approach targeting uh average performance low cost low risk highly likely to succeed to approach to to accomplish your objective which is being average.

or will you try to be above average in the face of the very strong competition that exists will you endure the costs will your pursuit of being above average uh permit you to be exposed to the risk of being below average and will you engage in this pursuit of superior performance uh which is not that likely to succeed.

U you know the first thing I learned at University of Chicago was that on average most most people do average before fees and below average after fees and the thought at the time 1968 was well why don't they just buy one share of every stock in the S&P 500 there was no discussion of index funds or indexation these had yet to be invented Jack basically by Jack Bogle at Vanguard in 74 but you can see where the concept went and uh today most uh mutual fund Equity Capital has managed past ly or through indexation so it it was not irrelevant it was persuasive.

Jack basically by Jack Bogle at Vanguard in 74 but you can see where the concept went and uh today most uh mutual fund Equity Capital has managed past ly or through indexation so it it was not irrelevant it was persuasive.

will you try to be active and be above average or passive and be average do you uh have the uh people in hand who can accomplish it or the ability to find those people and and hire them as outside managers um what happens uh at the moment when uh you know uh average performance is X and a few people publish performance which is much better and your bosses say who's the idiot who signed on for average performance um so these are questions but it's very fundamental to the selection of an investment approach to understand and reflect the concept of market efficiency.

the next is coming where is knowing where uh Returns come from um you can have an average portfolio and do average or you can say well this is a company that I think is going to deliver positive news which is unanticipated by others positive surprises and if you can uh figure out which ones will deliver positive surprises you can overweight your portfolio uh toward those and then when the news comes out and it can forms with your view uh everybody else says oh I wish I had more they go out and buy it that forces the price up you are an above average performer so that's the root how uh regularly can it be accomplished that's the question.

uh everybody else says oh I wish I had more they go out and buy it that forces the price up you are an above average performer so that's the root how uh regularly can it be accomplished that's the question.

if you think different from others you have what we call a deviant perception deviant perception how often will you be right as opposed to the consensus being right and you being wrong um uh this is uh at the heart of things again you're up against intelligent competition.

and uh you know when I started my career at a large and bureaucratic institution uh in the equity Department people would ask well what do you think you can make for us and the answer was 12% well how do you arrive at 12 well the S&P 500 does 10 on average has done at that point in time for 60 years so if you can get 10 without any effort you should be able to get well let's say two 20% better with a little elbow grease in other words 12.

but what if all the elbow grease in the world doesn't accomplish anything because the Market's efficient and you can't get an advantage then it's not only a waste of effort but it's a waste of management fees uh that and of course management fees are the only certainty in the investing world.

now another important question is will you bet on macro forecasts everybody makes macro forecasts and yet I don't believe that they are of any use that's a mild exaggeration but not so great um the truth of the matter is that most of the time things continue as they are so a forecast of extrapolation is correct most of the time and most people share that view most people expect extrapolation extrapolation of the recent Trends the long-term trends is Incorporated in security prices so when the extrapolation turns out to be correct it's not a profitable expectation because everybody else had it as well it was in the price you paid.

the truth of the matter is that most of the time things continue as they are so a forecast of extrapolation is correct most of the time and most people share that view most people expect extrapolation extrapolation of the recent Trends the long-term trends is Incorporated in security prices so when the extrapolation turns out to be correct it's not a profitable expectation because everybody else had it as well it was in the price you paid.

the forecasts that are very profitable are the ones that call for um uh radical deviation from Trend radical deviation from extrapolation these are very significant when you make them and they're right the trouble is they're not right very often because most of the time things are extrapolated and so we have forecasts of extrapolation which are usually correct but not profitable and forecast of Devi uh deviation from Trend which are potentially very profitable but not often correct.

I take that an analysis to mean macro forecasting doesn't work and uh one of when we started oak tree 29 years ago this month uh we sat down and we wrote out the things we had been doing because we had the benefit of having worked together for 9 years already on average and uh we have a very simple investment philosophy of six points which governs everything we do and number five says that our actions are not driven by macro forecasts we are bottomup investors selecting IND individual companies not top down selecting markets and countries so that's a different we think we can get an uh an advantage by the way where does outperforming come from in short it comes from having a a knowledge advantage and you have to know something better than most other people to to outperform just trying is not going to help you if you don't know something they don't know so um we think we can get a knowledge advantage in studying the micro companies Industries and securities not the macro countries markets and rates for example so you know we bar that from our approach.

and number five says that our actions are not driven by macro forecasts we are bottomup investors selecting IND individual companies not top down selecting markets and countries so that's a different we think we can get an uh an advantage by the way where does outperforming come from in short it comes from having a a knowledge advantage and you have to know something better than most other people to to outperform just trying is not going to help you if you don't know something they don't know so um we think we can get a knowledge advantage in studying the micro companies Industries and securities not the macro countries markets and rates for example so you know we bar that from our approach.

so um we think we can get a knowledge advantage in studying the micro companies Industries and securities not the macro countries markets and rates for example so you know we bar that from our approach.

I one of my heroes is John Kenneth gallb who said we have two kinds of forecasters the ones who don't know and the ones who don't know they don't know and I've known for decades that I don't know so I think we have an advantage in that.

and then uh that kind of sounds like forecasting macro forecasting is unavail unavailing but the truth is that it can be worse than neutral in its effect it can be damaging in its effect and I quote the American humorist and novelist uh Mark Twain who said it ain't what you don't know that gets you into trouble it's what you know for certain that just ain't true.

no sentence that starts with I don't know but or I could be wrong but ever got anybody into trouble the ones that get you into trouble are the ones that say I'm sure that's such and such because if you believe something strongly and You Bet On It heavily and you're wrong that's how you get into big trouble.

so will you bet on macro forecasting this in my opinion is a critical and and uh overarching decision I wrote a memo U year and a half ago I think it was October of 22 um entitled the illusion of knowledge and it's a it's basically a rant against uh uh macro forecasting starting with a macro for a famous quote in each section um and uh I I think it's it's extremely important to decide will you or won't you start from a top- down macro forecast and most people do many people know they don't work they do it anyway and one of the I quote somebody in there as saying that most people couldn't get out of bed in the morning if they admitted how uncertain the the future is uh and so I believe that macro forecasting uh in my view often takes the form of uh can I say organized religion it gives Something to Believe In to dispel uh the great uncertainty uh present in the world they live in um and uh you know I believe that uh very few people have the ability uh to do it in a superior fashion.

and most people do many people know they don't work they do it anyway and one of the I quote somebody in there as saying that most people couldn't get out of bed in the morning if they admitted how uncertain the the future is uh and so I believe that macro forecasting uh in my view often takes the form of uh can I say organized religion it gives Something to Believe In to dispel uh the great uncertainty uh present in the world they live in um and uh you know I believe that uh very few people have the ability uh to do it in a superior fashion.

now the next question is how will you and your organization think about risk what is risk um you know in in all the uh formula uh mathematical work in the investment business people use variability of results as the measure of risk I don't think that's the real risk I think the real risk is the risk of bad outcomes uh but um the trouble with my form of risk is it's not measurable you can't measure what the probability of bad outcomes is in the future you can't even measure what the probability of bad outcomes was in the past you can only measure what happened which is a subset of what could have happened.

I don't think that's the real risk I think the real risk is the risk of bad outcomes uh but um the trouble with my form of risk is it's not measurable you can't measure what the probability of bad outcomes is in the future you can't even measure what the probability of bad outcomes was in the past you can only measure what happened which is a subset of what could have happened.

I on the last slide I I had a quote from Elroy Dimson who was a pressor professor at the London Business School he said risk means more things can happen than will happen the conventional view of risk is shown in this graphic here you have return on the vertical axis risk on the horizontal access and a line that swopes up to the right and mathematicians call this positive correlation if one goes up the other goes up most practitioners take this to mean that riskier assets have higher returns there's something wrong with that formulation if riskier assets could be counted on to have higher returns by definition they wouldn't be risky.

mathematicians call this positive correlation if one goes up the other goes up most practitioners take this to mean that riskier assets have higher returns there's something wrong with that formulation if riskier assets could be counted on to have higher returns by definition they wouldn't be risky.

so the the way I look at it is more like this I take these little bell-shaped curves I superimpose them on the same line it's the same underlying line but now as you move from left to right not only does the expected return increase but the range of possible outcomes gets wider and the bad outcomes become worse that I think is risk that is what people should concern themselves not the possibility that their return streams will be lumpy.

Buffett said I'd rather have a lumpy 15 than a smooth 12 and uh I think that makes a lot of sense.

so I think the most important job of the professional investor is to manage risk and uh you know Greg in his talk said what do you believe in and I think that's very important and you you could hear in his presentation how much of the time they devote to assessing managing and balancing risk and we have to do the same thing we have to assess it and manage it even though we do it from a bottomup micro level not to down but um I think that you have to constant work with uh risk but you have to never assume as Mark Twain cautions uh that you know it for certain we never know what is going to happen and the events show that in the world we never know how the market will react to What happens in the short run uh and if you want proof of those two statements take a look at the US presidential election of 2016 everybody was confident of two things Hillary would win 80% probable and if by some Quirk of f Fe Trump won the market would collapse instead Trump won and the market went up for 14 months 30% so we don't know and uh we don't ever assume that our uh intellectual process permits us to get uh the risk under control.

uh and if you want proof of those two statements take a look at the US presidential election of 2016 everybody was confident of two things Hillary would win 80% probable and if by some Quirk of f Fe Trump won the market would collapse instead Trump won and the market went up for 14 months 30% so we don't know and uh we don't ever assume that our uh intellectual process permits us to get uh the risk under control.

and then lastly you have to accept that it's very hard to have both Superior returns and low risk um uh a high degree of safety taking going for Superior returns meaning means taking some risk you have to either bet on riskier companies riskier propositions things that are considered unpopular and out of favor and things that if you're wrong will result in your being below average.

yet and you have to figure out for yourself what your approach is I'm a player and last summer while watching uh the tennis tournaments uh especially Wimbleton um I wrote a memo entitled fewer losers or more winners.

you have to have an approach in my opinion which will uh organize your pursuit of superior returns and there's really two ways to do it you have to either have more of the things that do above average or less than the less of the things that do below average there is no alternative of course you could do both I think for most people given their mentality one or the other is more likely.

the the the conservative person can in theory have fewer of the things that do poorly the skilled aggressive person can in theory have more of the things that do well each person has to understand their own mentality what's possible for them and thus their Pursuit will what their Pursuit will be and these things in my opinion taken together are examples of the elements that combine to produce uh an investment philosophy and we've done it at Oaky everybody knows where we stand everybody is pulling together in the same direction thank you very much.

each person has to understand their own mentality what's possible for them and thus their Pursuit will what their Pursuit will be and these things in my opinion taken together are examples of the elements that combine to produce uh an investment philosophy and we've done it at Oaky everybody knows where we stand everybody is pulling together in the same direction thank you very much.