Paul Marshall: My worst investment ever was probably the first Iraq war. So there's a long goes back a long time. I remember because the date of the invasion was August the 2nd 1990. It was my birthday and then 7 months later the Americans finally struck on Iraq. By that time I had built a very significant long position in oil services, oil stocks and so on. And I had an absolute nightmare. Absolute nightmare performance. My worst performance year ever by a long way. Could have lost my job really.

Nicolai Tangen: Hi everybody. I'm Nicolai Tangen, the CEO of the Norwegian Wealth Fund and today my guest is one of the most successful investors of our generation. Sir Paul Marshall started Marshall Wace in 1997 and today is one of the largest and most successful hedge funds in the world. Marshall Wace combines man and machine and they built the world's first alpha capture application which is like a system that collects trade ideas from thousands of brokers, tracks who gets it right and puts money behind the best. Now Paul has also written down what he knows about investing in his book "10 and a half lessons from experience". He's also huge on philanthropy. So let's explore this and other things today. Paul, warm welcome.

Paul Marshall: Thank you, Nicolai. Great to see you again. It's been far too long.

Nicolai Tangen: Absolutely.

Paul Marshall: And I should say when you say I started Marshall Wace, Ian Wace and I started Marshall Wace very much as a partnership and it's remained a partnership and a broadening partnership all through its life.

Nicolai Tangen: When you started Marshall Wace, who decided that Marshall was going to be before Wace? [laughter] alphabetical.

Nicolai Tangen: Now, today you run around 90 billion dollars. What is it that Marshall Wace is best in the world at?

Paul Marshall: Um well, it's very presumptuous to say you're best in the world at anything. But I guess what we could claim... I would probably claim two things. We're probably best in the world at Alpha Capture because we created Alpha Capture. So that was our unique contribution. Secondly, I would say we may be best in the world at combining discretionary with systematic investing. So over the years, our original route in discretionary fundamental investing has been combined with systematic and they are actually turned out to be highly synergistic. So our discretionary side has benefited hugely from the systematic side.

Nicolai Tangen: And the systematic side has benefited hugely from sitting in an environment where people basically are very focused on fundamental and on the market. So it's never ever been remotely detached from the market. In fact, it's a very market-orientated way of doing systematic.

Paul Marshall: And we'll come back to that.

Nicolai Tangen: But why have you been successful now roughly 30 years when so many other funds have kind of fallen by the wayside? What do you think is the key to it?

Paul Marshall: I think the single most important thing is continuous innovation. So a lot of people in our industry perfectly legitimately started as a very smart guy looking at balance sheets with a Bloomberg terminal and that's all you needed, and some very smart guys—not very many but some—have continued to flourish primarily relying just on being very smart. But we have gone well beyond that and effectively embraced every type of innovation to the point where we're almost now a tech firm rather than an investment management firm. So it's changed out of all recognition because we innovate every day basically.

Nicolai Tangen: Because you do say in your book that most fund management careers end in failure.

Paul Marshall: Yes. Well, that was a different point really and that kind of reflected the observed pattern of my previous firm, but also a lot of fund management firms I think get into the problem of hubris—where they grow and grow, they don't have discipline around capital, and they don't have discipline around or a sense of their own mortality. And so a lot of firms get too hubristic, too big, and size matters which is another thing in the book. So they get too big and the market positions own them rather than them owning the positions, and when they're wrong that can drag their business down and destroy their return patterns.

Nicolai Tangen: How are you reminded daily about your mortality? Do you have somebody telling you? [laughter]

Paul Marshall: I don't have anybody at my shoulder. But basically, as you know, Nicolai, if you look at the success ratios of managers, a really good manager might have a 53, 54% success ratio. So 46% of the time they're wrong. So every day, one day in two, you go home feeling you're a schmuck. And my wife can testify to that. I can come home, I feel I'm a schmuck. I got something wrong. So you've got to be pretty head in the clouds not to understand that actually it's a very fragile path and it's very difficult.

Nicolai Tangen: Well, it's a humiliating job but yet there are a lot of hedge managers who are not so humbled but that's another discussion.

Nicolai Tangen: Um but let's go back a bit. 1997 you were head of European equities at Mercury which was you know a tremendously successful company and then you suddenly decide to walk away, start a fund with Ian Wace, why?

Paul Marshall: I'd always wanted to have my own business. Why? I don't know, that's something in me. I even made the mistake of announcing it within six months of being at Mercury that my long-term goal was to have my own business. But it was Ian who approached me.

Nicolai Tangen: And he was the head of sales. So he was doing sales.

Paul Marshall: No, he was originally head of sales at Warburgs. He was the first person I ever spoke to in the market. He called me my first day at Mercury and they were part of the same company. Then he became head of proprietary trading at Warburgs and then he became head of proprietary trading at Deutsche Bank. So he moved away from sales. And so he wanted to hedge, he was ahead of the game really. He wanted to set up a hedge fund in Europe at the time when there were only arguably two other equity long short hedge funds in Europe and he approached me and the timing was perfect from my point of view.

Nicolai Tangen: Is he... are you like the analytical kind of the deep thinking analytical machine and he's kind of the fast-moving kind of thing, or how did...

Paul Marshall: I would say that was the original basis. Ian is also very strong on technology. He's a great believer in the power of technology. So he created at Warburg's a trading system which still exists within I think it's UBS now that ultimately owns it called Oasis. So he brought an interest in tech which to be honest I was not very focused on, and so we are extremely complementary as I think you know, and understand each other's strengths and weaknesses.

Nicolai Tangen: And you said that you were fund number three in Europe, so there you had already two other firms, they were...

Paul Marshall: Odey and Egerton I think were the two that...

Nicolai Tangen: Egerton, FYI, is where I learned my things. And by the way, John Armitage is coming up in a future episode. So stay tuned.

Paul Marshall: Cool.

Nicolai Tangen: Um now, how much more difficult is it to start a hedge fund today than what was the case back in 97? What does it take?

Paul Marshall: That's a great question. I think the AUM you needed in 1997 was 50 million. Now because of the regulations, basically most people estimate it's 300 to 500 million to get started and cover your costs. And I think also in those days my expectation of our business and of the industry was it would remain a cottage industry, highly fragmented, lots of small operations as I said at the beginning, people looking at annual reports and crunching the numbers and making calls. And that's how I thought it would stay. And now of course it's become highly concentrated, just like almost every industry becomes concentrated, the entry barriers have risen and risen, and it is much more dependent on technology and operational...

Guest: capability, financial capability. All of these things matter much more than they did originally.

Interviewer: You got half your start capital from Soros. How did that come about?

Guest: Uh well, there's a um we basically just went and knocked on the door with in in New York and the meeting was actually with Stanley Dooker Miller and there's a very funny story which is too long to tell on this podcast. Um but uh

Interviewer: in in five sentences

Guest: um somebody said uh be careful with Stanley. He's like a uh a lizard. He'll sit in the corner of the room, won't say anything, and then he'll pounce. And um we we basically he didn't that's exactly what happened. Didn't say a word. Ian then at a certain point he said tell me do you ever use any charts technicals when you when you invest? And Ian said, "Quite frankly, I've never read a met a rich chartist." And Stanley said, "Thanks very much." Uh, and that was pretty much the end of the meeting. We went outside the room and the people who had brought us there, which was Morgan said, "By the way, you just met met the world's richest chartist." [laughter]

Interviewer: Absolutely. Well, we've we've had him on the podcast. He's very very successful and very good.

Guest: Yeah.

Interviewer: And Andy, a good choice, Andy. and uh you know evidenced as his investment in uh in you guys.

Guest: Yeah.

Interviewer: Um now um you just after you started you had the Asian crisis you just went straight into these big things. So

Guest: I think Asian crisis was actually when we were marketing uh I can remember in New York being it might have been the day of the Soros meeting the market was down 7% on one day but no we first after we launched we had the 1998 the LTCM crisis which we were fine with we didn't have we weren't and the Russian crisis but we didn't have much exposure in either way so we weren't affected very much by that.

Interviewer: Have you ever been close to failing as a firm?

Guest: Uh yes. Um uh well not maybe I mean to some degree in so in in 2008 we went from 14 billion AUM before 08 to three and a half billion. And the reason primarily we our our performance wasn't any definitely wasn't worse than other people but our client base was weak in the sense that it was largely fund of funds because we'd never actually marketed. We never went out like some competitors to institutions and uh tried to build a firm client base and we relied on people knocking on our door. So it was only in 20045 which seven years in that we had any marketing people

Interviewer: and fund is a fund which takes money from retail investors and invested in [clears throat] funds like yourself.

Guest: Yeah. And what happened was that they they a lot of them got into difficulty and had liquidity problems. A lot of our um competitors gated investments uh even though there was no real basis for gating because there was no liquidity issue. We did not have a liquidity issue. So we did not gate. So we became the cash point uh and assets under management went down from 14 to three and a half.

Interviewer: What did you feel like?

Guest: Uh to be honest it never we we were angry with our competitors. Um but I but I I never felt much angst for some reason. I actually enjoy crisis. So uh it was a moment of uh it I was actually more excited by what was happening and the and the what was going on in the market than I was stressed by the risk of the business.

Interviewer: How do you cope with stress? Do you have feelings? Do you get angst?

Guest: Um less and less. I think uh um one of the criteria we we now do personality tests for for all of our hires and one of the things we we use the five core personality trait test. Um and um one of the five traits is stress tolerance and um I have a extremely low extremely high uh stress tolerance uh and kind of first or second percentile. So I don't get overly stressed. I actually enjoy crisis. They're the best. They're the best.

Interviewer: Would your Do you think your wife would agree with you?

Guest: Yes. Brilliant. [laughter]

Interviewer: She would evening, but I don't I think she would. Yeah.

Interviewer: When did you um first understand that wow, we want to do something big here. We're going to be really successful and kind of high five in ways and you know really happy about life.

Guest: Well, there was um it was obviously a successful period after after Alpha Cap. We we created Alpha Capture kind of in kind of the 2004 to 78 period. But then the real and then obviously 200910 we were building out of uh the crisis learning our lessons doing things a bit differently more strategically and I think it was probably 13 14 when we were starting to see really see the fruits of that uh in terms of the growth of the business and the solidity of the returns.

Interviewer: You sold um a stake in your business to KKR. Well, I think you've done it in in two stages, but why did you want to have uh a private equity firm as a part owner of your business?

Guest: They approached us and they actually approached us uh twice before we were interested to have a conversation. And I would say that the key element of the whole discussion was that they they they only wanted to be a minority investor, not majority investor. And that was critical to me. And um but the the the key at the time 2015 16 was that we wanted we were a partnership. We wanted to create some kind of way of putting a value on the shares in in a in a real market related sense. Uh and so and there was a a secondary benefit obviously that being endorsed by a firm like KKR was was a pretty good endorsement and uh no doubt helped us with with institutional fundraising.

Interviewer: Would you have done it again?

Guest: Um, that's a very good question. Uh, with hindsight, we we feel that we would have succeeded in pretty much the same way anyway. But, uh, they've been a fantastic partner to us. They're they're a great firm. Uh, they have a highly entrepreneurial culture at the top of the firm. Uh and so there's never been a moment when we've not um thought that uh that we've really regretted it. I mean I think it's it's very unusual in the sense it's an investment that's worked for both sides.

Interviewer: Let's move on to to TOPS which is your alpha capture system and which is in a way what you're what you're famous for right as a firm. Just um tell tell me about the start of it.

Guest: Yeah. So the genesis story is that Ian uh this was 2002 so five years in Ian um said you know there's got to be a better way of measuring the street the cell side um because we we were giving out commissions like some people still do today I think by a voting system or some kind of qualitative assessment of uh their research. And it was a big budget and um so he said well you know how can we measure this more scientifically and so we gave to a young intern called Anthony Clake the job of saying how can you measure uh the cell side and what he did it was the age of the internet and he said well let's let's create an intranet uh and get all of the salespeople uh on the on the sales side it was initially just Europe to contribute their ideas via a portfolio system. So we created a virtual each of them had to run a virtual portfolio uh for us um in a transparent intraday uh bas basis and this was at the time was completely uh a radical change. It was almost like a reverse engineering of the relationship between the sell side and the buy side and um uh but very quickly it caught on. I was the big skeptic because I had the arrogance of the buy side. I said well surely that all sellside doesn't generate very much value and I was completely wrong and within a few months it was clear that salesside were actually creating a lot of value for us which we could originally we weren't even turning to monetize it which we could we could monetize and turn that into real portfolios in uh that we would manage about two years after about two years we launched uh a real monetized portfolio under the Marshall waste ban Yeah.

Interviewer: And you put what 10% of the capital or something into it.

Guest: Correct. Yeah.

Interviewer: How does it work now then? How many external contributors do you have to this platform?

Guest: Um well it's it's uh hundreds. We don't give the exact number but it's all over it's obviously all over the world. And the first phase of the evolution was to take it from Europe

Paul Marshall: ...to the US which is in '05 and then to Asia in '06. Um and that was if you like the global rollout. Then the next thing is that obviously this is how it's we got into the the subject of continuous in innovation. Uh we started we need we knew we had to develop optimization uh to extract the best data to identify how to combine signals uh combine contributors combine signals about contributors look at patterns so on so forth. Uh then the next thing was to look at our trading because essentially tops trade traded and trades around twice a turns over twice a month. So much more than our fundamental uh side of our business. Um so that led us to go into algorithmic trading uh very early for a fundamental firm obviously not so early for a systematic firm. Um and then post 2010 we we we developed very active machine learning uh to to mine the signals properly and to to branch out into all other types of uh data to bring in to create signals. So TOPS became much much more than an alpha capture system. It's it's a proper very market orientated systematic uh strategy.

Nicolai Tangen: So what are so so with so with AI what what are what's some of the mining you can do what are the type of things you can look at now

Paul Marshall: well AI obviously um some of the things that people associate with AI actually were already happening with machine learning uh like uh sent scraping for sentiment uh looking at brok scraping every broker's note for sentiment scraping social media for sentiment uh looking at balance sheet data all kinds of fairly obvious things you could already do. What AI does is take it to a whole new level, a whole new depth. Uh and so whereas looking at sentiment data might be looking at kind of fairly basic uh signals and word patterns, AI allows you to do look at the whole context of every single piece. But what I would say Nicolai is that today although AI we think is going to be totally transformational of our uh of our top system uh the biggest change to date is on been on our fundamental side where it's been completely revolutionary. uh and this is again where the synergy comes in because of the infrastructure we have we've been able to apply it immediately to the way we do fundamental investing and everything to do with distillation of information to start with and so multiple varied ways of tools to distill information for our managers so that we absorb all information very rapidly overnight and they have it at their fingertips but then also we've we've moved to the point where we already have aentic portfolio managers is developed far by our fundamental teams by transforming their skills into uh into uh a portfolio system. Um and all of that is before we go to recursive self-improvement. So, our head of tech thinks that we're going to go from 200 quants, quant researchers to 10,000 quant researchers, by which he means we'll have 10,000 agents. Uh, and they'll be uh recursively analyzing all of the data, improving and developing new ways of uh implementing the signals into live portfolios.

Nicolai Tangen: How many people are you how Paul, how many how many people are you in the firm now?

Paul Marshall: We're around 750.

Nicolai Tangen: And how many people are in tech?

Paul Marshall: 200 over 200.

Nicolai Tangen: It's interesting because in the in the Norwegian Sovereign wealth fund, we are 700 and we have roughly 200 in tech.

Paul Marshall: Oh yeah. So we're moving on a parallel path except you've got rather more assets than us.

Nicolai Tangen: Well, um but hey, what what have you have you increased the numbers in tech since you came since you arrived?

Paul Marshall: Yeah. Yeah. Yeah.

Nicolai Tangen: Meaningfully. Yeah.

Paul Marshall: Yeah.

Nicolai Tangen: Yeah. [clears throat] um and and uh on the AI side of course. But hey, this is really interesting because it it it kind of leads it into your book 10 and a half lessons from experience.

Paul Marshall: Yeah.

Nicolai Tangen: And there you talk about uh you know the fact that actually uh people can you say markets are inefficients, humans are irrational, investment skills is measurable and persistent. The thing is that with people like you um operating in this market, aren't markets just becoming more and more efficient? How can a human being beat these markets?

Paul Marshall: I think I think it's although efficiency itself is a kind of convenient myth. Uh it is also the case that markets are getting more efficient. I I would agree with that. That's and that's because information which you we when you and I started we used to talk about information edge. It's very difficult now to have an information edge because the the good firms are receiving and processing the data all the time in real time. Um but uh analytical edge still remains and what you've always got to look at is the ecology of a market. So I think actually what's going to happen with AI is that more retail investors will feel more and more empowered. They'll think that they have just as much information as Nikolai Tang and or Paul Marshall and therefore and they and they probably arguably do if they're well organized. Therefore, they're empowered to make investment decisions. So, the share of trading done by retail will go up and up and and I would say that you can't necessarily rely on retail to be as skilled as the best hedge funds. So I think it it is getting more competitive but I'm not not at all clear uh whether it's going to get more more efficient over the next uh years.

Nicolai Tangen: Is the retail part of the market kind of the market uh where US professionals can make more money? I mean are retail investors there to be fleeced?

Paul Marshall: I think that's always been the theory, right? So, so you look at the markets with the highest retail share like China, uh, Taiwan, Korea, US is now growing and they're likely to be more inefficient. Um, because of the the way the decisions are made um, and that's that's definitely been the case in terms of way where a lot of the alpha has been a you can get extract. Uh, so I I'm I'm saying that's likely to continue. Clearly the retail investor is going to be more empowered now than he or she was in the past. Uh but I still think they won't take decision. They won't have the same risk management culture. They won't have the same set of criteria as institutional as hedge funds specialists.

Nicolai Tangen: So 700 people, 200 in tech, that's that's that leaves 500 people. How in 10 years time how many people do you need you think with all these machines?

Paul Marshall: Um we at the moment think that the headcount there's no reason why it's going to move very much from we went from here. It went up a lot in the last three years towards 7 750. It's been stable for two years. We think that AI um is leading to huge boosts in uh productivity and um the quality of decision- making. Uh but it's not leading anybody to say at the moment. There's one team where they've cut back one fundamental team where they've cut back the headcount, but that's one out of 15. Um not leading anybody to think that we'll need less people. We're just going to we just we may be needing a different type of person. That's a different question. But we don't think we need less people. We think we're going to get more out of the existing people.

Nicolai Tangen: Very interesting. It's exactly our philosophy here as well.

Paul Marshall: Yeah. Okay.

Nicolai Tangen: But does it help you uh trade more cheaply? Just what does it do on that side?

Paul Marshall: Um I wouldn't say that yes, but but that is not the primary focus. We're not we're not in the age we're not directly competing with high frequency traders. We haven't made the decision yet to go in that direction. Uh it just helps us to trade. I mean, we've obviously been trading more cheaply for ever. I mean, our our our trading cost numbers are very low, I would suspect, compared to any any other traditional hedge fund other than systematic hedge funds. But we're not not going down the route of HFT and uh giant data centers just focused on that yet.

Nicolai Tangen: Why does man plus machine beats a machine?

Paul Marshall: So that um saying which is one of the chapters in the book uh was originally came allegedly from Gary Kasparov after he was defeated by Deep Blue in 1997. So when we just when we started Marshall Ways um and the original the first part of it was a machine beats a man. Uh but a man plus a machine beats a machine. And I guess the reason uh I'm confident of that is it presupposes that there are skills that the AI can't do and

Paul Marshall: ...less good at than a human. Um and clearly the AI there will be some things that the AI can do better. So we now have a a term uh now casting which the whole business of assembling data um and getting every single possible input together in order to anticipate quarterly earnings and positioning and so on and how stock that is we think getting commoditized. So it'll get that is getting a harder space which never was never was the main space we operated in. That's a kind of podcast uh pod shop not podcast pod shop space. Um but what will remain in my opinion is the skill of judging the market judging how uh the market behaves in um in particular circumstances. So if you just take the recent take the recent uh fun and games in Korea and in the kind of this momentum crash we've seen in um in the last four to six weeks. um a obviously what you have the particular example of Ken Griffin but taking out situational awareness that's a man is thing a machine wouldn't have done but every good hedge fund in that environment would have looked at the at this set of circumstances and look and and they looking not just at the fundamentals which is of the stocks but also of the ecosystem of the market what's going on here what what is happening in Korea what is happening to the uh who who are the buyers and sellers of the Korean market which has set this all off supposedly. Uh what's happened to the leverage at ETF market? Uh what's happened to hedge fund holdings or foreign holdings of Korea? What's happened to the hedge fund behavior in the United States? Then you get into understanding how looking at how risk managers in traditional hedge funds would have been basically d-risking the funds because their V was too high. So they're autom they're systematically d-risking at possibly at the arguably in our opinion at the wrong time because of high vault rather than because of anything wrong with the fundamentals. So what I'm saying is there's a there's a whole balance of things which include both the fundamentals and the technical situation and the eco the ecology of the market which are very I don't think a machine yet will be very good at. It's the it's the the human who brings it all together and sees the opportunity uh and and senses blood in the uh in the distress.

Nikolai: So you mentioned a lot of the factors which are impacting the market just now and you have the machines and here we have the human uh Paul Marshall. How do you interpret today's market? Where are we today?

Paul Marshall: I think unlike the FT who said we were in a bubble two years ago, I think that we're not in a bubble yet, but that we will go into a bubble at some point in AI. But at the moment, the fundamentals for me for uh I stepping back the AI artificial intelligence is the most important thing that's happened in Europe arguably in in the history of capitalism. I think it's it's uh I try very hard to find um superlatives to try and communicate internally and externally what's going on. The best one is the kind of the idea of a Cambrian moment when there's a huge explosion in biological evolution uh 500 million years ago. It's that type of thing or it's like the steam engine. It's it's the it's an intelligence explosion and it's huge. And um we look you've got the external data and you've also got our internal data and our own use of tokens is exploding at the same uh rate as you see on open router or as we see in anthropics data and so all through the year I've looked at the what's going on in the tok in tok in terms of the token explosion and I think we're early days particularly because in six to 12 months we're probably going to go into recursive self-improvement when this is going to be happening 24/7 overnight. We're going to set our computers to work overnight. Well, they already do, but we're going to they're going to be self-improving overnight.

Nikolai: What is the recursive self-improvement going to do, you think?

Paul Marshall: Well, I think it's it's going it's going to be coming up with whereas at the moment the humans are coming up with the skills which or the prompts and then the skills which we put in the test overnight the system is itself going to be self-correcting of evaluating changing the skills etc and modifying the skills. So it's going to we're only at the the very very beginning and I think hedge fun management somewhat at the tip of the spear in terms of AI. So we actually have an early glimpse of the scale of the change. Corporates are much slower to adopt it for all kinds of historic and bureaucratic reasons. Big companies find it difficult to approve things quickly.

Paul Marshall: So the the adoption numbers are going to carry on exploding and so I think we're in early days. So that coming back to the market then you look at the the market and as you know you look at the valuations of of the stocks in the in the center of the story they're cheap the semi-index in in the US is at a five or 10 year low depending on how you look at it. The Korean market is at a all-time low valuation. Now you can there are arguments about the cyclicality of some of the some of the stocks but essentially the stocks have only moved up now in line with earnings if that and so that part of the market is going to carry on powering ahead in my opinion and it and we haven't really seen the big effects yet in terms of the productivity benefits from adoption. So the rest of the market will also benefit from that. So I I think we're going to go into a very good period. It will no doubt have its bubble components uh and it'll get overheated. We already had one overheating moment, but I think that's what we've got to navigate is is a market where there'll be a lot of excitement and periodic overheating, but the underlying fundamentals are very strong.

Nikolai: When do you think we'll go into a bubble?

Paul Marshall: Um I don't know. I can't predict when we'll go into a bubble, but it'll it it it for the bubble to really happen, it needs one, I think, rates to stay low and therefore and to encourage speculation. Two, uh valuations to get very extended, which definitely hasn't happened. three uh increasing leverage uh un unsustainable leverage which you you had in the Korean ETF uh market that was a that was a bubble phenomenon but it's correct it's now corrected so the numbers have basically it's gone from $60 billion of leverage ETF down to 20 in the last uh uh five weeks um so you'll get and you'll get those types of leverage conditions And if I guess the Nvidia this Nvidia 500 million deal if they then try and turn those into CDOS of GPUs and sell two times levered versions of those instruments that could be you know you those are the types of phenomenon we got 20078 um but we're not there yet. I think the my p my path would be absolutely we're going to have a big bull market with a bubble top and you you're going to have to navigate all of that but I don't think we're there yet.

Nikolai: How much higher is the end of the bull market from where we are now?

Paul Marshall: I wouldn't want to predict that Nikolai. It depends where the earnings

Nikolai: is uh is AI deflationary or inflationary.

Paul Marshall: Well, I think what the market wisdom when which I consensus which I share is that in the very in the short term it's slightly somewhat inflationary because of the uh demands for chips and and and and going through the supply chain for energy. Um that is inflationary and the inflation happens before you we're seeing the real disinflationary effects in terms of uh productivity growth. But I I personally fully expect to see very big productivity growth and um uh some weakness in the labor market certainly for the new entry- level labor market at some point probably quite soon actually um you're seeing it the UK univers six to 24 months That's in my person. It's not there yet in the data, but I think it's going to happen and that will be bullish for markets because it would take the pressure off interest rates in the first instance. That'll be bullish for markets.

Nikolai: What about the the wave of humanoids and robotics?

Paul Marshall: Uh well, that that that is almost like another wave, right? Uh I I fully I I sign up pretty much to anything that Elon says or does. And uh even you know if if he if it

Paul Marshall: happens slightly later than he says um I think there's every reason why physical AI will be a major factor two in terms it's already we're seeing it in China but as a deployment and implementation roll out two years three years. So that's going to be another wave of the story. Also will feed massive token. Nobody quite knows how how big the token draw will be from physical AI, but it will be big.

Interviewer: I kind of think you'll reduce the number of divorces when you get these humanoids because they're going to take care of the stuff that people that make people divorce, i.e. who's going to take out the rubbish? Who's going to empty the dishwasher?

Paul Marshall: It may be, but my wife wouldn't agree. She would probably say that the the healthy sharing of tasks is a good thing. uh and uh if you if you uh subcontract it all to a machine, there wouldn't be any sense that you're you're in combination looking after the home. It's becomes a vacated space.

Interviewer: So is the time you sell the market when the token use decelerates at Marshall Ways?

Paul Marshall: Possibly. Yes.

Interviewer: Go down or just decelerate?

Paul Marshall: I think that would depend. Yeah, that's a very good question. It depends on why it's decelerating and what the blend of between the different uh tokens is and so on so forth. I haven't thought enough enough about that question. It's a good question. But generally deceleration I would say probably deceleration. In fact, yeah, now that I think about it, it would be it doesn't need to go down. That that that would be far too late. It's deceleration.

Interviewer: Moving back to your original uh kind of job, the fundamental analysis, uh what makes a what makes a good investment? What do you look for?

Paul Marshall: Um, what makes a good investment [clears throat] is not quite the same as what makes a good company. So, what makes in in the book I talked about the Ben Graham phrase, in the short term, the market's a weighing machine. In the long term, it's sorry, long way around, a voting machine. The long way longterm it's a weighing machine. And I do believe in both of those things, right? So, I think that a good investment has to respect both ends of that spectrum. And the weighing machine is obviously about wearing weighing cash flow and free cash flow. And voting is about what is the market what does the market think? How's the market positioned? And so you've got to be get both ends of the spectrum right. And that's why my I was thinking about this, but my t my personal time frame is probably 3 to 12 months. So I I need to look at the long-term value of a business and and why it could be worth a lot more or a lot less if it's short. But I also need to be very assured that there are enough catalysts in the next 3 to 12 months which are going to confirm my hypothesis visav the market. Now uh nobody really knows that uh you were one of the people I interviewed in connection with my master's uh uh thesis uh on asset management which I did in social psychology

Interviewer: some seven eight years ago and uh the topic of that one was uh the top portfolio managers in Europe's use of analysis versus gutfield where uh could you remind us where you are on that scale I are you analytical or are you a gut feel kind of guy

Paul Marshall: uh I well I think anybody's got to be both these days right so I I I spent the first my apprenticeship being doing analysis right like my time at Mercury was all about learning all the analytical tools and um that is that is a necessary but not sufficient condition for doing for doing this job um but what I believe I've come to believe more and more in the importance of huristics which is what your I think your thesis was out and and and gut and gut feel. And interestingly, uh I've come to the view more recently that that by far the best assurance of people doing well is is is their own track record and their level of experience. So I I actually think the level of experience in market in markets is getting more rather than less important uh because because of the need to be able to deal with volatility uh and and and an understanding of patterns and how they've worked in the past. So I I I would say everybody needs to be both, but but I think that the one in less short supply is that I think gut feeling is not the right it's it's not gut feel in the sense

Interviewer: No, it's pattern recognition.

Paul Marshall: Yeah. Exactly. It's pattern recognition and it comes from a long long amount of experience. So I think experience is heavily undervalued in the market.

Interviewer: Although the problem with experienced people is that they become too stuck in their ways. So you got to be what you got to look for is experience but also the flexibility and the ability to evolve and change uh yourself uh as well as to innovate.

Paul Marshall: Yeah. Which is a tough combination. Why is shorting so difficult? Um so shorting is uh this is you know was is another chapter in the book and some of these points are obvious to people in the business but uh first of all the shorting the ecosystem of the market is set up for long for long investing basically the brokers this all the press everybody is essentially interested in success stories and they're actually conflicted because they want to boost they want to have business of the company so they can't be seen to be negative that's the first thing uh The second thing is a riskmanagement problem which is that when the stock goes up, you are short more of it. If you're long a stock and it goes down, it you have less of it and you can add to it and you average down. It's a very good and healthy discipline and and it and it actually helps you to end exit with a with a good overall outcome. If it goes up against you, it's very hard to add to the position. And then the third thing is that uh shorts can be very expensive and essentially when you're borrowing the stock you're competing against the smartest people in the market because you're essentially only competing against hedge funds uh and they're typically smart people and that the therefore the view of the stock is reflected in the borrow rate. So it becomes a very expensive um exercise. So all of those reasons make it different from longs and um

Interviewer: do you find that people can be good at both?

Paul Marshall: Yes.

Interviewer: Are you good at it?

Paul Marshall: Hopefully. Uh I think that my actually my certainly when we started Marshall waste I dis I absolutely love shorting. So I discovered that I enjoyed shorting more than longs probably because it's you're fighting more against the tape and more against consensus.

Interviewer: But are they just kind of pretty depressing people who you don't want to have a beer with?

Paul Marshall: Oh [laughter] yeah. But it because it's a very very diff I would never choose to be a short seller as a profession. It's a nightmare for the reasons I gave and they I know they've got a lot to be depressed about because they can't make the same kind of returns. If you have short if you have a small directional bias and you have shorting as part of the way you generate alpha and shorting is the way you fund your longs as well to have you to have more long growth in the market. Shorting is a is a great thing.

Interviewer: Let's move on to debrief and training and you you write a lot about it. But I know you spend a lot of time and are very very thoughtful about how to learn from mistakes. What is your uh what's your worst investment ever?

Paul Marshall: Um my worst investment ever was probably the first Iraq war. So there's a long goes back a long time, but it wasn't a stock level. This was a portfolio level. And um I remember because it was August the date of the invasion was August the 2nd, 1990. It was my birthday. And then uh seven months later the Americans finally struck on Iraq and um in in January. By that time I had built a very significant long position in oil services, oil stocks and so on. And I had an absolute nightmare. This is a long only portfolio. Absolute nightmare performance. My by my worst performance year ever by a long way. Could have could have lost my job really. And it was just a major major failure of uh risk management.

Interviewer: What kind of system do you have to learn from mistakes at Marshall Ways?

Paul Marshall: I know what we one of the things we we talked about before was uh debriefing of trades. We don't debrief

Guest: ...individual stock trades because going back to what I said earlier about success rates individual we don't have draw down limits on individual stocks because individual stocks are not the essence of producing great outcome for your clients unless you're a highly there is a small number of highly concentrated hedge funds uh where the individual each individual stock does matter but for for us it matters less what matters is the overall portfolio construction so we debrief very heavily and risk manage very heavily at the portfolio level. We have draw down limits for portfolios. We don't have draw down limits for individual stocks. Clearly, if somebody's losing a lot of money in a stock, uh we want to look at it, but we don't have any formal debrief process.

Nikolai: How do people learn them from the mistakes? If I'm a portfolio manager and I have a bad year, what kind of information do you give me?

Guest: Just immense amount of information. So, so you you uh um you you will have your success ratio uh your win loss ratio. So, understanding your slugging ratio, which I think is incredibly important for a fundamental manager. For systematic trading, the slugging ratio doesn't really come into it because they're highly diversified portfolios. And in the world of the future, for fundamental managers to do well, they have to have a high a very high slugging ratio.

Nikolai: Explain slugging. Slugging ratio.

Guest: Slugging is the proportion of your gains that are in a small number of stocks where you've chosen basically to really lever your conviction or show show your conviction. So we look at the uh success ratio, slugging ratios, alpha by sector, by country, by longs by shorts. These are all the kind of top down metrics you'd look at to try and understand what a manager is doing well or badly. Um and yes clearly if there's one individual stock which has hit you for 3% of NAV or something you you would want to look very deeply into why that happened.

Nikolai: But people hate looking at their own mistakes. Do you actually get them to learn from them?

Guest: Absolutely. Yeah. Uh absolutely. I mean that's the cult the cult the culture of the firm is which I certainly with Ian tried to instill is one of one of humility in front of the market. So we all fail every the whole point we made earlier

Nikolai: we all fail every day.

Guest: Um and so it's quite natural to look at your mistakes and that's how you grow and and you learn. Um and I think one of the ten the traits of people at Marshall W is humility. We don't like people who are arrogant. Uh we don't so we don't we always like people but we don't like people who we don't like arrogance and it typically will mean you don't get hired if you're arrogant.

Nikolai: So when do you when do you kiss people goodbye? I mean clearly there must be limits to how many mistakes you can make.

Guest: Yeah. Um but the the reality is um we have a much higher uh level of stability than than typical firms which have a lot of managers and that's I think because it's very difficult to get into Marshall waste. uh and to get in as a portfolio manager you have to already have de demonstrabably strong track record which goes back over quite a few years

Nikolai: from another firm

Guest: from another place. Yeah.

Nikolai: Do you train anybody from scratch?

Guest: Yeah, we have so we have 120 people still on the fundamental side and and most of the analysts want to become fund managers and there's a process through which they go where they gradually get more access to capital over time with the ultimate goal and quite a lot of our managers are people who've grown up in Marshall waste but it's a long process where we where we we can we can plot monitor everything about everything they do um and just like we do with our tops contributors um and and they gradually we find out what they're good at, what they're not good at and and they and they have to prove each step of the way. So it takes as it should do for their actually for their for anybody's own protection. It should take time to be proven.

Nikolai: How long time? How long time?

Guest: Um I wouldn't want to put a number on it because you obviously get the occasional exceptions but uh typically I would say 10 year if you're starting out of co college or out of business school 10 years to be to be really provable as a proven as a great fund manager and be given the kind of money we give to our big managers.

Nikolai: And how do you train them? Is it only is it like apprenticeship they work with a experienced person or or do they go through?

Guest: We have now we now have an elevate program [clears throat] which is a training program for for star potential stars coming straight out of uh business school or college. Uh and that's kind of a whole bunch of different types of training and access to people across the firm and access to external training. Um we uh and then there's um from then on they largely learn under their managers. They they can operate within an alpha we have an internal chops program if you like an alpha an alpha program which allows them to to test their stock picking. Uh and before they run any money at all uh and then when they would run money they would start initially just advising on a subbook. Then they would go to running a subbook of a small size. Then they would ultimately go to running a full fullyfledged portfolio. We also have an emerging managers program um run by one of our senior managers um which is designed to take take people in who are got very special claims to run money but haven't got necessarily got as much experience as we'd like to see. So there's multiple roots in if you like uh and but the great thing as you know Nikolai in this business is that there is immense data uh to assess everybody and everything and so with that data you can make uh you can form judgments uh

Nikolai: if you sit on the other side of the table now you're I'm straight from uh some kind of uh fancy pancy university and you're interviewing me because I would love to become a portfolio manager at the great martial waste firm. just what do you what kind of questions do you ask me?

Guest: Well, can I back to back a wave slight give a background to that question? We've come to the view with in the age of AI that that what matters more than skills today is traits. So it is not sufficient anymore that people come from a great university who got first class degrees. I don't completely trust the university system anymore uh in terms of uh what it produces because the traits the traits you need to do well in university include memory uh and memorializing and copying and pasting serving up what you know the examiner wants rather than creativity and what the what the traits you need in the age of AI include agency well primarily it's agency so the ability to be self-driven, self motivating to learn for yourself, curiosity which don't necess is not necessarily proven by university. Um and then um disagreeableness. So we in the amongst the personality traits that we test for are openness, yes, stress tolerance, yes, but also disagreeableness, which doesn't mean what traditionally people think it means. It doesn't mean that you're not a nice person. It means that you are willing to take on and challenge the consensus on any subject

Nikolai: like like like being like being an ass.

Guest: Being an ass.

Nikolai: Yeah.

Guest: No, it doesn't

Nikolai: disagree with us.

Guest: It doesn't mean being an ass. It means that you disagree that you're willing able to disagree. It actually means you got to able to able to able to disagree in a civilized way. And um so the ideal traits of a hedge fund manager, which is a very unusual combination, they got to be very open and very disagreeable.

Nikolai: Do you think society creates less disagreeable people these days?

Guest: I think society unfortunately we were in an age of of the clone uh and bureaucracy and expert class and uh and the traits you needed to succeed in that era which I think is ending were um essentially um the age of the exam passing classes uh so and they that era is ending hopefully and the will give the new era will give more uh value to um agency, entrepreneurialism, openness, curiosity.

Nikolai: I uh love your concept of high agency people because it's what we what we are looking for too. But how do you

Guest: what do you how do you find

Paul Marshall: high agency people? Uh it's difficult, right? So you've got to uh because the the normal system is producing not well some of them are high agency but it it it doesn't necessarily the university system doesn't necessarily reward high agency. So you need to see evidence of uh create creativity uh outside what said what's normally expected. You need to see it. Entrepreneurialism is a sign of high agency. Uh hobbies that are taken to significant lengths of achievement uh are is signs of high agency. And then the way you the way you test people uh and um both in the tech side and the fundamental side and quant research, we now have tried to adopt adapt the way we test to try and uh test for originality in thinking.

Interviewer: Paul, let's move on to uh philanthropy. And here we should in a way start to call you sir Paul because uh you've been indicted for your tremendous effort in the philanthropic space in the UK. Uh what what um what are your priorities within philanthropy?

Paul Marshall: Um well for right from the start education has been the big passion and um with with we set up a charity called ARC ARK um with with a about 20 six years ago now um with other hedge fund managers in uh mainly in the UK and uh although we did stuff outside education including a lot of work on HIV in Africa. Um

Interviewer: >> but just a few more words on ARC. I mean you transformed part of the UK education sector.

Paul Marshall: >> Yeah, we were very fortunate that there was a moment in British education when there was a real reforming reforming moment started with Tony Blair and then Michael Gove and um there was an opportunity to to go into the sector and uh help turn around failing schools. That's how it started. And obviously we knew nothing about education. Uh but we said we wanted to apply the types of disciplines we apply in our day day-to-day business to this. And we we spent time lot of time in the states understanding the charter school movement, understanding how other people how the successful schools delivered in the inner city and uh and then and then sought to apply it in the UK. And um it's been very rewarding for Ian and I and for the other people who are there at the foundation. uh we now have about well we have 39 schools we've just mer t t t t t t t t t t t t t t t t t t t t t t t t t t t t t t t t t t t t t t t t taken over very interesting chain in Yorkshire. So going to around 50 schools uh in some of the most uh disadvantaged parts of of the UK and and we go in and and try and do education schooling in the way that leads to great results. Uh and it has been transformational. We've had out outstanding results. Uh, so

Interviewer: >> has your has your Christian faith influenced the way you think about philanthropy? You think?

Paul Marshall: >> I think so. Yeah. Um, and um because I really admire those who do it without Christian faith. I I look at Ian who doesn't have faith and he has just as much passion as I do. uh and uh but for me um the the the idea that we are all basically equal in the sight of God's of God and and all and um every person is sacred every soul is sacred that that leads me to to towards education because essentially uh outcomes are not equal in our society but but and I don't believe they should be but uh everybody should have as much as possible an equal start in life. And so that's led me in the way I think about politics and and and and philanthropy to be very much focused on equality of opportunity and giving everybody as as as fair and good a start as they possibly can have.

Interviewer: M you also ventured into the media industry and made some uh what should we say controversial uh investments in particular a spectate spectator and you were also in the running for the telegraph right so uh tell me about it

Paul Marshall: >> well I started uh getting into into the media as a frustrated customer um because I didn't I wasn't satisfied with what I was receiving in the media and that led me to set up something called unheard which I hope you subscribe to um which is which is set up really to designed to provide to challenge people's thinking. So it's it's a hetradox site uh with no political partic alignment designed to but to challenge one's thinking. So it's it's what I'd like to read every morning. Um then I was a co-invest in something called GB News which which is the one that's controversial actually. Uh and then the spectator and the telegraph came up for sale. I ended up uh bidding for the spectator um amongst many others and um I think it's it's the world's oldest political magazine founded in 1828. It's highly influential uh and an incredible brand. Uh it had great editorial team but it was pretty poor management on the techn technology side. So there's an opportunity to turn around the technology and continue to build build the business.

Interviewer: >> I mean there's a long tradition in the UK of um wealthy people owning uh media companies but yet when you when you came in here I mean why there's been a lot of uh what should we say uh different opinions about it. >> Yeah. >> Why um why do journalists uh hate wealthy people? I don't think all all journalists do and I don't necessarily think >> I'm sorry why I'm sorry I should rephrase it. Why do they why do they don't like that wealthy people go into media?

Paul Marshall: >> Um well I think all journalists are distrustful of any proprietor potentially because the proprietor is perceived to have the power. Um and a lot of journalists I think are very comfortable where they are. uh and and journalism is a is actually a a relatively comfortable profession. Uh if I compare it to fund management, uh we there's a lot of similarities between fund management and journalism because we're both essentially need to be curious, understand what's happening today, predict what's going to happen in the future. The difference is if a fund manager gets it wrong, gets it wrong, he or she is out of a job. There are many journalists who who consistently get things wrong again and again and again and they're still in the same job because journalism is primarily or has become tribal and so actually you're not you're not seeking the truth you're seeking uh to please a tribe. That is profoundly unhealthy. Uh so I I want to challenge the tribal thinking. Uh so I've gone into the the spectator doesn't really fall into that category but unheard and GB news do go into the areas where where I think things have become too tribal and and provide something alternative.

Interviewer: >> Are you buying political influence?

Paul Marshall: >> Uh I I hope not. I mean, I think that the um media is perceived to have a lot of a lot more influence than it does in terms of the written media. I think the TV media does have a lot of influence. So, I think GB News, um, is more influential than I'd expected and that's why people are so upset about it because it's challenging the I essentially the TV um landscape in the UK un the written journalism landscape in the UK is pretty balanced. There's right and there's left. the TV landscape pre prior to GB news was essentially progressive uh secular progressive uh BBC, Channel 4, ITV and Sky are all pretty much the same world view and GB news is coming and challenging that worldview. So the 55% of the population was unserved by the existing TV news uh providers and that's why people are very upset about it. So and that but that's also why it's been very successful. Um so so yes and and it's and therefore that has been influential.

Interviewer: >> Has it been has it been successful in your eyes?

Paul Marshall: >> Well, it's not successful financially, but it's been very successful in terms of its market share because it's now overtaken comfortably both BB news, BBC News and Sky. It's the number one news channel in the UK within five years. Um but it doesn't get the advertising revenue because uh of the campaigns against it and against the advertisers but that will that'll change in due course.

Interviewer: >> You were um a keen u Brexit supporter and also helped finance that campaign. What do you think about the decision in retrospect?

Paul Marshall: At the time of the decision I was probably like a lot of people on both sides 55 45 didn't have a strong view but I I had a marginal view in one direction and my reservation I so I I believed in Brexit for sovereignty and I believe that the British tradition of uh common law and

Guest: democracy and rule of law in one country as opposed to internationally was absolutely part of what Britain was and therefore um uh I was very supportive of that aspect. I had reservations about the economic effect because of the the the friction impact of leaving the single market. I've now come to the view that I was completely right about the sovereignty issues. Um and we haven't done enough on that. We haven't left the ECR um uh and done the complete in fact complete Brexit. Uh but I was wrong on the economics. Actually, we'd be much better off if we'd made a proper break with the EU and embraced innovation because I think that in and you you can see the the divergence between the US economy and the European economy. You eur EU is a regulated entity where the bureaucrats are in charge. There's no innovation. Um and the US is is forging ahead and um Britain sadly because of the political dysfunction failed on failed completely with the city to embrace blockchain and and become a world leader in that area. Uh we we've kind of halfway house on AI. We we avoided the European AI act but we and data protection act but we haven't really embraced the same freedom as the United States and um we embrace net zero which which basically means we have the highest electricity prices in the world. uh and the only place where we didn't did take advantage of the freedom was uh in uh biotech and genetics where we we have a separate regulation on genetics and as a result we're now starting to produ produce genetic crops but if we'd embraced innovation and essentially followed the American model on the areas where we have natural strength we would now be having some very interesting signs of of growth uh and I think that's think that's the future for the UK.

Nikolai: I think the same I think the same goes for a lot of uh many parts of Europe. So you're not alone there.

Guest: Yeah. Well, and maybe what will pro you know the ideal thing is Britain embraces innovation and then the EU sees somebody on their doorstep embracing innovation and follow suit. Uh so the pressure eventually causes a change within the EU. uh which would be a good thing obviously and Nikolai I'm sure like me as an investor looking globally Europe is of very little interest is 25% of our gross commitments but in terms of what's going on mo most of my day is understanding what's going on in the US and what's going on in Asia

Nikolai: for sure in the technology landscape uh US is is leading uh that that's for sure we do have fine companies in Europe

Guest: [clears throat]

Nikolai: US and Asia. Yeah.

Guest: Yeah. Yeah. Absolutely.

Nikolai: What do you want your legacy to be?

Guest: Um to have made as much difference as I can uh to a lot of people's lives and at the moment to save Britain. Not not that I can do that single-handed, but I think Britain's going gone down very bad path in several ways and I want to make a contribution to to sorting that out.

Nikolai: How do you relax when you are not trying to save Britain? [laughter]

Guest: Um, I like to do gardening and planting trees, but that's little less relaxing at the moment. About to go to France and, uh, discover how many of our plants and trees have died. I like to watch football, uh, but that's also become less relaxing since the Glazes uh destroyed Manchester United. So, I haven't been relaxed about that for 20 years. Um, but gardening, sport, music, reading.

Nikolai: What do you read?

Guest: At the moment, I'm slightly obsessed with the Holocaust, uh, which doesn't sounds a bit morbid, but, uh, I do think it was the most important historic and moral event of the 20th century. Um uh I just finished reading a book called Into Darkness by Gita Sereni about the commonant of Trebinka and how that evil happened and who he was. I think the the best book that everybody should read is uh Night by Ellie Visel. Uh and um so that that's uh yeah that's slightly my obsession at the moment.

Nikolai: And if we finish off on a hopefully slightly more uplifting note uh what is your advice to young people?

Guest: Um I think it uh links back to a lot of the earlier conversation. I first of all uh be agentic. Second, uh, don't take anything anybody's word for anything. The the motto of the Royal Society is nullius in verbber, which is loosely translated as don't take anybody's word for it. And and that's what real science is in terms of this instead of this nonsense about follow the science which we've had in the last five or 10 years. So young people as they go through university need to interrogate everything they hear, read for themselves. Certainly [music] don't trust the university consensus. Um and that's so that's the second thing. And then the third thing I would say is be patient because life is uh certainly much longer than I anticipated. you've got lots of time to do all the things that you want to do and [music] uh there are great things to do and uh and as we I mean we were just saying before we started that this is the most exciting time ever to [music] invest. So it's an incredibly exciting moment uh to enjoy and to uh to make a difference.

Nikolai: Well, that's an that's a a great place to uh to finish. a big thanks for taking the time sharing all uh you know [music] sharing part of the secret source all your thoughts uh you know your your wisdom and uh wow you've done so [music] many things congratulations

Guest: thank you Nikai it's great to talk to you

Nikolai: really hoped you like the episode if you did please like it subscribe and put on the notification This really helps us to get new great guests.