The Exchanges

Q Well, thanks. I appreciate it. This is something that has been near and dear to your heart for a long time, and why don't we just start with, what was your history at thinking about ESG at Overlook?

A I think when we look at ESG, we separate them into three distinct buckets, and all of them have their unique characteristics, their unique challenges, and so from our history, we started out with the governance That governance, when I went to Asia in 1985, corporate governance was an enormous issue. Most of the companies we invested in had controlling shareholders, and so they were really in control of the governance. And the social work started sort of 10 years later, and the environmental work started 10 years later, so it's important to look at that sequencing. But if we just talk about the governance, I can share a couple of stories from really the old days of my Early experience in fighting for corporate governance in Asia. The first one happened around 1987, 1988. Prior company I worked for owned a share in a property company and the owners weren't behaving themselves. We had really hard evidence that they weren't behaving themselves, but they didn't seem to listen to us. And we finally, we went to them and said, look, sir, you can either talk to us privately or you can talk to us publicly. And they said, yeah, we'll talk to you publicly. So we drew up and really got all the evidence, and we actually filled out a full-page ad in the South China Morning Post a couple of days before the EGM that we had called, and it was pretty damning, really. I wouldn't have wanted someth…

AI assessment note: “we started out with the governance That governance, when I went to Asia in 1985”

Q So by outlaw, do you mean exclude those industries from consideration in your portfolio?

A Yeah, I do. We excluded them from the universe. But as I've gotten more educated on this, I've seen that companies can change. And so I think we need to be more open to not just hard close certain industries. And I'll give you the example. My favorite example is a Danish company called Orsted. Orsted used to be called Dong, which was the Danish oil and gas company. And 12 years ago, 10 years ago was classic oil and gas company. And it transformed itself. 100% transformed itself from an oil and gas company into now the largest generator of offshore wind in the world. And so we see other companies. BP has announced that they're going to be carbon neutral by 20 50. Shell is moving in that direction. And I think we can now be more nuanced in our exclusions While pursuing a policy of excluding industries every year.

AI assessment note: “Yeah, I do. We excluded them from the universe.”

Q And how about on the governance of the business and some of the social issues?

A As we really began to think about social issues at companies, it was a lot of factory conditions, environmental conditions, and within factories. But there's also really a lack of women at the higher ups, and so we set out a long time ago to get better balance, and about five, six years ago, we reached our goal, and today, Overlook is 12 people. We're half female, half male. We're half Asian, half Westerners. Our median age is 41 years old, and that diversity adds complexity, but it also has richness in the investment making and the business decision making, and I credit Hong Kong, which is near and dear to my heart, as a place where you can achieve this, and it's very difficult to achieve it in other cities around the world, and so I'm deeply grateful that we've been able to headquarter ourselves in Hong Kong.

AI assessment note: “today, Overlook is 12 people. We're half female, half male.”

Q Now, I know your main focus of late, of late being a while now, has been on environmental issues. Why don't you start with your perspective and your learning curve in that area?

A I moved back to California to give a bit of background. I moved back to California about 20 years ago, and I was very concerned about my kids. They were in elementary school, middle school. I was concerned about them living in California, and we started joining a group of doctors that went down to rural Honduras after Hurricane Mitch had basically wiped out the country. And we went down and just provided basic medical care. And I joined the medical mission because I speak Spanish. And it was great. I loved it. I was putting my daughter where she was bathing kids with scabies and impetigo. We were all sleeping on the floor. We were all getting sick. I mean, it was just, it was just one of those horrible ten-day events, and we did it every year. But it developed a great social perspective for my daughter and understanding that more people need help. And along there, we came to a realization that I didn't want to pass out pills. And one of the problems we saw in Honduras, where the women and children were all sucking on nebulizers, and we'd take over a classroom of a school. They were all around the outside of the classroom sucking on nebulizers, and I didn't know what the hell was going on, you know. No one could smoke. They couldn't afford to smoke, and then one day, my eleven-year-old came back into the clinic, into the school courtyard, and said, Dad, I figured out the nebuliz…

AI assessment note: “I moved back to California to give a bit of background.”

Q And how, how does that cap work today?

A Well, we had a hard cap at the beginning, and then I, you know, someone would want to come in, and then I'd raise the cap, you know, and offer it up to other people so that everyone could protect themselves, kind of like a rights issue. And then about 20 years ago, I came up with this idea, let's limit the amount to, I think it was 12% of the last four years average NAV. So in big years, I bring in percentage-wise less, and in bad years, I can bring in percentage-wise more, and so you're kind of adding a counter-cyclicality to the business, and what that 12% meant that we could raise about seven or eight percent new money a year, and with that, the capital-weighted returns, which is how the investors have done, not how the funds NAV has done, how the investors individually and And in totality of done, the time and capital weighted returns now were the same, over one, three, five, 10, and so forth.

AI assessment note: “let's limit the amount to, I think it was 12% of the last four years average NAV.”

Q And how did you evolve from what you had learned at that point in time to what most people would consider a value investment philosophy?

A Yeah, well, see, I had found Buffett in the early eighties and was reading Buffett. You know, and then when I got to Hong Kong, you know, I'd finished by then the CFA torture and was reading more broadly about putting this together. But it was really when I moved into Mark's offices, instead of working for someone else and executing someone else's stuff, I was now, you know, the lights are out. What am I, how am I going to invest? And that was where, you know, I came full circle back to Buffett, intelligent investor, and a lot of these other people who have had influence on me. Some of whom I've known, some I just read, you know, it's so much of available. And that was where I really came up with the investment philosophy, which I describe as rigid and demanding yet flexible, right? That, that was really pure.

AI assessment note: “came full circle back to Buffett, intelligent investor... where I really came up with the investment philosophy”

Q And by the way, let's just, we'll come back to the others. But as an aside, you have people like Tom Russo, who I had on the show and Warren Buffett, who would tell you, if you have tomorrow's price today, Just hold it and wait for the day after tomorrow because a great company is going to keep growing. So how do you balance the two?

A You know, through hard lessons, I've learned that that doesn't really suit me all that well. And that's where selling is an intensely emotional time. It's much more controversial than buying. And that's where rebalancing is so perfect because, and I'm so thankful for Charlie Ellis for teaching me this, but it's a completely unemotional event. But, you know, as stocks go up and up, they're getting bigger in the portfolio, just rebalance them down. And then one day, when they do go down, now you have the capital to really go back in. And if you didn't, when they come back down, they're still too big, which is a really big failing of people. So we, we rebalance. Of course, we often sell when we realize we made a mistake. And, you know, it happens. You don't bat a thousand in this business. And when you make them, sell it. Don't argue about it. Don't point fingers at people internally, and don't look back.

AI assessment note: “through hard lessons, I've learned that that doesn't really suit me all that well”

Q Asia, but then there was that moment where you said, okay, now we're going to do it. And you, You know, your clients know you for discipline, not in China. Now we're going to, well, what was that decision process like in that moment? Okay, we're going to make a change on the margin. How are we going to do it? And what are we going to tell our clients?

A Well, the first thing happened was there was a good problem where we had had a lot of consumer stocks in Southeast Asia, Hong Kong, and whatnot. And they all got up to 30 times earnings, and I kind of don't know how to make money from 30 to 40 PE, so we literally, we sold them all. Literally within six month time, we built up cash, and we were looking around, and, and, and my colleagues and I, we didn't have an idea what, we didn't know what we were going to do, you know. It was sort of a scratch your head time. And during that, you know, A shares, as we were screening and looking, A shares were popping up. And one in particular we came across and began to really think about, which was a company called China Yangtze Power. It owns the Three Gorges Dam. And there's no, as we say at Overlook, there's no dam analyst on Wall Street that you can call up for advice on what a dam is, you know? And it took me a while to figure it out, but we then figured out that really dams are the best infrastructure asset in the world today. That their reinvestment requirements are almost nothing, and so they're essentially financial assets. And when we figured out what China Yangtze power was, then we said, well, if this is this good, what else? And then what else? And then we found Huawei Auto Parts, and then we found Shanghai Airport, and then we found this, and then we found that, and we, and we…

AI assessment note: “the first thing happened was there was a good problem where we had had”

Q What are the key tenets to the other side of the case?

A That over the last 35 years, we've helped six hundred million people come up out of poverty in China. And America gets a big part of the claim of that success. They are natural business people, instinctive business people, and so we actually work in the same culture. But problems have developed over the last 30 years. Problems that Bush didn't address, Clinton didn't address, Obama didn't address, and these problems got built up. And they didn't get addressed because we were stuck in wars in Iraq and Afghanistan. And China wasn't a problem. Many of these problems could have been solved with private and confidential discussions with the Chinese, where you get in and talk frankly with them about their need to modernize, and they would have come back to us and said, we need to be involved in setting the rules for the WTO and WHO and so forth, and we could have had private and confidential discussions at the highest level, and we could have solved most of the antagonistic points But instead we misunderstood the economics behind the trade deficit. Administration came in and it was a zero sum game. Deficit bad. Surplus good. We got a deficit with China. They're bad. Not understanding the value add of the trade deficit with the United States. And, and so we could have. There's also a second bucket of problems with China that are difficult and going to take a long time to solve. North …

AI assessment note: “over the last 35 years, we've helped six hundred million people come up out of poverty”

Q So you made it through the crisis. How did your clients behave? I mean, you had a hundred thirty million, which was, you know, it was a reasonable-sized fund back then.

A Well, my largest investor left right before it really hit in June of I replaced him, and then calmly took my new largest investor down by 60%, but then they came back in with additional capital, and, you know, we made them hundreds of millions of dollars afterwards, but, but, you know, you lose your, your biggest investor. It's like, everything's challenging, and so you, I, I have created what you call the roadmap for a bear market, so calling every single investor more transparency, more discussion, more You know, give them the detail and the transparency through the portfolio. You can't hide. There's no denying I just kicked the hell out of everybody, right? So you, you, you just talk about your big positions and why you've got confidence and, you know, debt-free balance sheets run by good guys.

AI assessment note: “my largest investor left right before it really hit in June... then they came back in”

Q What type of valuation was that at the time?

A Oh, we were probably at a unlevered free cash flow rate of about 11, 12%. Levered higher, you know, with the best energy assets in the country, best utility assets in the country. Sells their utility, sells their electricity way below coal, nuclear, gas, wind, solar. I mean, so it was cheap, right? So we didn't say anything for a year. And that's generally kind of our modus operandi. We do not go look for trouble, but we do try to pay a positive role for business. It's just to help people understand how we think. You know, these guys had no experience. I was the first foreign investor in the company. You know, even back then, it was still a twenty billion dollar company.

AI assessment note: “we were probably at a unlevered free cash flow rate of about 11, 12%”

Q So why don't you talk a little bit about what that investment philosophy is and how you, how you've applied it over the years?

A Yeah, so let's describe it first off. So the first thing is we want to be in superior businesses. In many ways, I can give my dad credit for that. He always talked about being in great companies, right? Superior businesses have free cash flow. They generate cash. They have a large moat. They have high returns on investment, whether you return on equity, operating return, however you want to do it. They largely have debt free balance sheets, and they're self-financing their growth. That's what a superior business is. Then we talk about management with integrity. We used to use this word integrity a lot, 25 years ago, because, frankly, it was integrity. Were these people willing and honest to be able to share the benefits of their public company with minorities?

AI assessment note: “So the first thing is we want to be in superior businesses.”

Q How did you think about the opportunity cost of exclusions?

A Well, Jeremy Grantham put out a document three or four years ago that said there was almost no cost to that exclusion. Okay, and this was when the divestment move really happened. People were extremely concerned about just the divestment point of view. So he went from 1926 forward, took out all fossil fuel companies, And the decrease in your performance was less than .5 percentage point over that whole entire period, or possibly even less. I can't remember the exact number. So I don't think it's that, but there's two other aspects of this, Ted. Number one is the divestment part, which we have pursued is very straightforward, but then we also began to see which are the businesses that aren't what we call part of the problem, but they're a part of the solution. And then you start really expanding your research work into what companies are doing and how they're going to benefit or leverage climate change to their benefit. And here we were accelerated along this road through an investment we made about six, seven years ago in a company called China Yangtze power. And this is the largest renewable energy company in Asia. One of the largest in the world. But from my perspective, why I really invested in it initially is it is the lowest cost provider of electricity in China. Way cheaper than coal and all the other resources. And what we discovered as we got into China Yangtze power wa…

AI assessment note: “Jeremy Grantham put out a document three or four years ago that said there was almost no cost”

Q And what have you done on the philanthropic side?

A Well, about four years ago, my wife and I decided that as we set up a foundation, began to really think about what we were going to do, and a whole host of issues that we could have been involved with. I mean, there are lots of problems around the world that need to be solved. We came back to climate change, and so my wife and I really dedicated 95% of our philanthropic giving To fighting climate change, and we do it through a variety of ways, and while that community of philanthropists is growing, we are badly outmanned, ok? The fossil fuel industry spends way more than the whole group of climate philanthropists would pay, or would spend every year, so it's a big fight, we're overwhelmed, we're outgunned, but it's an important fight to have, and so we are nearly a hundred percent dedicated to that.

AI assessment note: “dedicated 95% of our philanthropic giving To fighting climate change”

Q Yeah, yeah. I wonder if you could talk a little bit about the notion of continuous improvement in your process, because a lot of the things you're talking about, I know you've evolved into. Where does that come from, that need, that new idea to enhance a research process that is an otherwise simple portfolio? You know, 20 names, couple new names a year, go visit a bunch of companies.

A Well, I think there's this idea of innovations, right? We've brought a, we've incorporated a lot of innovations that are designed to give insight into stocks. Pricing power is a classic example of that, right? So you have to have a group of people around you That are intellectually hungry, intellectually interested in their challenge, competitive, and are searching for ways to get insights. You know, and it's strictly just intellectual drive that, that brings these things, and they can come along. We've had a lot of innovations that we've incorporated, but then discarded. But I, I want to be really clear. We haven't invented any of this. Ok, we picked it up from all the great investors, people I knew, people I didn't know who had just written, we picked it up and we cherry picked this to put it together so it felt right to me. So, it's, it's not fair that any of my colleagues or me get credit for inventions, but we've, we've embraced these innovations to improve the process.

AI assessment note: “it's strictly just intellectual drive that, that brings these things”

Q Where have you seen the progress thus far from the companies you're talking to about taking these initiatives seriously?

A It's hard because really until about a year ago when the global ESG movement began to really take off and we saw it in the papers a lot, Ted, we would talk to people about it and it was just right over their head. They didn't need to listen. Now over the last year, we've gotten a bigger baseball bat effectively. And so it's opening up opportunities for us to become more aggressive on writing, more aggressive on communicating, more aggressive on demanding things. But there's a lot of work. 44% of our portfolio got failing grades last year, simply because they could not tell us what their admissions were. There's a lot of work that has to be done.

AI assessment note: “44% of our portfolio got failing grades last year, simply because they could not tell”

Q And so how did you evolve from there to founding Overlook?

A Well, I got my freedom in 1991. We sold the company, and I got, I had a little bit of money. And I went over to my friend Mark Farber's office, and I said, Mark, I'd like to see if I could get a desk in your office. I didn't even ask for an office. I said, just give me a desk. And I don't want to be your employee. I just want to be in an environment where people are investing as principles. And I want to, I want to be in that environment, because that's what I want to be. And he gave me his little library, which was about maybe 12 by 10, had a desk lined with books, a wobbly aluminum chair where the guests sat, and outside there was a little Filipino who, Mark was buying all the mail buttons at the time. And this guy, this Filipino, literally right outside my office, he would polish and put in little plastic sheaths, uh, Mao buttons all day. And Mark, Has the collection of Mao buttons in the world. Amazing. And, and, and in fact, I, I had known Mark for a number of years, but really, that was where I became really enamored with what he brings to the investment world. The, the, the thought, you know, and he's a very different guy. He's a macro guy, and I'm a quintessential company guy. But Mark was so good. He always told you the other side of the coin. He always made you think about something that you weren't thinking about. And he wrote well. He communicated well.

AI assessment note: “Well, I got my freedom in 1991. We sold the company”

Q So if you look over this path over the last eight or 10 years, what have you learned that you wish you had known when you started out thinking seriously about these issues?

A Well, I wish I had started earlier. I wish the whole world had started earlier. I think for me, as someone who's done well in life, I've been very blessed in a lot of ways. I went, as a high schooler, I went to an all-boys boarding school in Northwest Connecticut, and the school had three sort of fundamental principles that I think a lot about, and the first one's simplicity of life. I really am trying to lead as simple a life as I can, and not let wealth or power or Overwhelm you. And the second one is self-reliance, which is really the creed of the entrepreneur in many ways. And the last one is directness of purpose. I've always been a big one on focus, you know, and this is where it comes from. But directness of purpose within your wider life. I think when you put simplicity of life, self-reliance, and directness of purpose together, it's a good rule book for all of us.

AI assessment note: “Well, I wish I had started earlier. I wish the whole world had started earlier.”