By Damon Kitney
Warren Buffett calls it “Woodstock for Capitalists”, the annual shareholder weekend for his Berkshire Hathaway group that draws more than 40,000 people to Omaha, Nebraska to hear from one of the world’s most revered investors and his vice chairman, the now 96-year-old Charlie Munger.
Twenty years ago Ian Darling and Mark Nelson, directors of $10bn Sydney boutique investment manager Caledonia Investments, famously made a video of the same name about their annual excursions to Omaha.
November 10 was the 20th anniversary of its first screening, so Darling and Nelson watched it again last week to reminisce.
“It hasn’t aged all that well I have to say. It was really about the old Bing Crosby, Bob Hope, The Road to Mandalay or something. This was like Ian and Mark on the road to Omaha to see Warren and Charlie,” says Nelson, in one of the only wide-ranging public interviews of his life.
“But the film I suppose it really did get us to think more about the whole style of investing of these people. And I’ve remained very close to Charlie. In fact I spoke to him last night. I speak to him every week, every Tuesday night on a Zoom call. And he’s 96, which is phenomenal, and still as sharp as tack, which is great. So I had a good chat to him last night about various things, getting his take on the (US) election and stuff like that. They’re terrific people.”
Following Buffett’s style of high-conviction investing has underpinned Caledonia’s investment philosophy since it was formed in 1992 as a vehicle to manage the inherited wealth of John Darling, a 19th century Scottish immigrant to Australia who founded a wheat and flour milling business.
Ian Darling’s cousin Michael also bankrolled the business in its early years, before the later recruitment of star investment managers Will Vicars and Michael Messara.
Today Caledonia is one of the Future Generation Global (FGG) Company’s numerous pro-bono fund managers.
Speaking with Future Generation Global chief executive Louise Walsh on a podcast, Mark Nelson — now Caledonia’s chairman — says the firm’s very high concentration portfolio has given him a “hollow pit in the stomach” at times of extreme market volatility.
“When you’ve got big positions like that our portfolio can swing all over the place but we believe that over the long term with the research we’ve done and our conviction on those investments is enough to make us keep holding on. And if they actually go down for no particularly obvious reason we can buy some more if we can,’’ he says in the Conversations with Future Generation podcast.
“All of us have the majority of our own money in the fund, which while that’s a bit scary, it’s also quite reassuring and comforting too in a funny sort of way. Not just for our investors but also for us because it means that we’ve got confidence in our conviction that we’re going to do this anyway. It’s not like an option. And so we really will work hard at it.”
In more recent years Caledonia has also started taking short positions on stocks, which Nelson says has made its portfolio more resilient.
Its all-in philosophy has paid handsome dividends over the past year.
Caledonia delivered a 28 per return from its flagship Global Fund in the June quarter, taking its annual return for the financial year to 38 per cent.
Its combined strategy performance of its Global Fund and its Global Co-Invest fund was up 38 per cent in the June quarter and up 31 per cent for the financial year, after fees.
Caledonia’s three big investments are in US online real estate group Zillow — alongside local billionaire Gretel Packer — online food delivery giant Grubhub and Canadian online gaming firm Flutter Entertainment, which last year merged with The Stars Group and is best known as the owner of bookmakers Paddy Power and Betfair.
In July Caledonia made its first move into the global music sector by taking a strategic shareholding in Warner Music, the biggest Wall Street float since the onset of COVID-19.
Nelson says there are three core things that are fundamentally important in equity investment. He regularly repeats this mantra to young fund managers.
“The first one if you can do it is to only restrict yourself if you like or only concern yourself with investments of absolutely high quality. And that has many facets to that. It is the quality of the business you’re investing in, and it’s also the price you’re getting in at which actually limits your risk obviously in terms of what you can do and hopefully it maybe maximises your return. So if you can really wait for those high-quality ones,’’ he says.
“If something’s a bit iffy, if you sort of go ‘oh, not quite sure’, don’t do it. Wait for the ones that you actually think it’s a no brainer. You know you’re buying a dollar for 50c or something and it’s got growth. They’re the ones you’re looking for. So if you can have the discipline to only deal in those ones and wipe the others out of your mind, not even bother with them, that’s a great start.” Nelson’s second point is to understand the rarity of a good investment: “They don’t just fall off the trees,” he says.
“You don’t just find lots of them. And it’s maybe you mightn’t find one for a year or six months or more. But that’s OK, just have the patience. Again recognise they’re rare. So it’s not your fault if they’re not turning up. There could be all sorts of other issues with overvalued markets or whatever it is. So when you recognise they’re rare that’s good.”
His third point borrows from one of Warren Buffett’s rules of thumb: at the start of an investing career every investor should have what Buffett calls a punch card with only 20 slots on it.
Every time you make an investment it gets punched.
“And you’ve only got 20 and once you’ve got 20 done you’re done, that’s it. And his view was that if you had that card right at the start and knew you only had 20 goes at it you’d be very careful. You’d be very cautious about ‘is this is a punch card investment?’,’’ Nelson says.
“So you don’t need many. If you had two crackerjack no-brainer investment ideas in a year, and that goes with the two you had last year which have compounded, and the two from the year before that which have compounded twice, then you start building up a portfolio that’s got incredible momentum and because you haven’t been selling all the time you haven’t been paying taxes and things.”
Most importantly Nelson stresses that patience is a fundamental virtue.
Asked about the COVID pandemic and its impact on Australia and the world, Nelson doesn’t pull any punches about his concerns with overreaching governments.
“I think there’s been a lot of dare I say illogical decisions made in Australia in the last few months and exemplified by these border closures which have just been ridiculous,’’ he says.
“If you talk to a lot of professors as I do in the medical world … It looks pretty clear that the health outcomes of the community in total haven’t been helped by a lot of these restrictions. So you’d like to see there be some changes there but people are very intransigent. And then people do things for political reasons and that’s quite aggravating. And you’re seeing that, as I said, with the different borders. But, look, it is what it is.”
But Nelson, a long-time governor of the Florey Neuroscience Institute who did a Ph.D in Neuropharmacology at the University of Melbourne, graduating in 1986, has great faith and hope in development of vaccines.
He notes that in history any major crisis has usually been followed by periods of great innovation.
For example, he says the innovation following World War II led to the birth of the aerospace industry. And the Global Financial Crisis sparked the development of blockchain, neo-banks and even cryptocurrency.
This time the COVID pandemic has been a health crisis.
“So the level of innovation that’s occurred in health generally has been unparalleled. And certainly through the Operation Warp Speed, as they’re calling it, which is the race to improve vaccines for this particular virus, that’s accelerated at a pace never been seen before,” he says.
“And not just because they took away or not took away but lowered the bars to make the time period a lot quicker to get these things to come to fruition, but also encouraged different styles of vaccine technology.”
Pharmaceutical giant Pfizer said last week that early data from its vaccine trials showed 90 per cent efficacy.
“And all these vaccines, some of them are very different in terms of the vector or the carrier that they use to deliver the vaccine, but they all look like they’re producing the level of antibody protection that you need, which is great. And vaccines typically don’t have a lot of side-effects because they’re very specific to a virus. And so yeah I’m very hopeful and very confident that they’ll all be ready to go pretty soon,” Nelson says.
But trade wars worry him.
The relationship between the US and China became deeply strained in the final year of the Trump administration, catching Australia in the middle.
The consequences of that are now being seen in China’s increasingly belligerent threats to close its markets to our exports.
Bans have been mooted for timber, sugar, copper ore and copper concentrates, wool, lobsters and wine after punitive action was taken against Australian barley, beef and coal.
“I think our biggest global concern is still China in terms of our relation with China. And that was massively deteriorating obviously under Trump,” Nelson says.
“So you’d like to think that Biden would be far more conciliatory in that area to China, which hopefully will follow through to us so that we can do that as well.”
You can listen to the latest episode of Conversations with Future Generation here.