– November 2002 –

Confessions II: Is there something better than great sex?

Okay, this is not a rhetorical question…this is Confessions Part II where I will be discussing once more my life as a global macro hedge fund manager. I understand that 3000 people downloaded the first podcast; thank you very much!

Ok, you want pressure? I mean real gut-churning, unpleasant, kind of pressure? For the quarter to date, in this instance, we are 2 months into my first quarter as a manager, the stock market is up 9% and my fund? My fund is darn down 4.9%. Holy Shit!

For the month of November, nada: the stock market was up nearly 1% and I was down eight basis points, we call that flat from where I come from. And so, it was a kind of blah or uneventful month after the maelstrom of my first active month.

Perhaps not so blah because I give the first indication that I’m building a short position against the dollar. And as you know, the other night, I was putting out some thoughts, really some posturing on the dollar, regarding the desire of the Fed, their compulsion, if you will, to stop the dollar from rising further after its big move in March 2020. And so, I find myself asking are we set to relive a similar moment of dollar weakness?  And, again, we are going to go, to the end of 2002 to set the scene.

Eclectica, was always meant to be a metaphor for the life of an investor, a life of speculation that is capricious and were unexpected things happen that cause people to say, who would have thought this could happen!? I wanted to say ME. That I was the guy that kind of thought crazy shit was always about to strike.

Ok, where were we? Ah yes! I was accumulating a short position against the US dollar. I was buying commodity futures, principally the CRB index, and you can see that I presented the charts showing where the launch of Eclectica was in the context of this brewing storm of a huge bull market; for what turned out to be the bottom in the gold price.

You can see a long price descent, the descent into hell, in terms of a bear market spread over multiple years. You can see that in terms of duration it was long, I want to say more than a decade, and what you see is that prices stopped falling: that commodities no longer lost their purchasing power versus other risk assets like stocks.

Of course, the reason for self-righting the commodity boat, was that stocks had by that moment collapsed during their sell off from late 1999. For me, this was like dropping a pebble into the still pond found at the base of my mind – it depth charged and aroused my curiosity find out what was happening; to send my research team out there to ask questions and try and legitimize whether we could really come to terms with the price action. Could we scale-up and own lots of these commodity futures? If a hedge fund is like a sports car? How fast could we really take it?

In terms of my holdings, that’s to say my top five longs and shorts…what can I say? The situation is a little better than last month in that we disclose modest risk positioning – bear with me because everything was tentative and therefore individual risk positions were a side-show. As always it was really all about what we didn’t show you in these letters that mattered more. But at least you can see the emergence of some risk posturing: 4% NAV in the CRB contract for January delivery, 4% NAV? Yeah, big whop-it-day-doo…4% NAV size.

This month’s stock insight was Amsterdam Commodities. And there were many things going on inside my head.  Principally I had three trains of thought: my analyst, George Lee, I want to talk about George. Second. Let’s have fun with Amsterdam…nudge, nudge but coffee shops and inspiration…? And finally, I want to go out with a BANG. Is there really something better than great sex?

Ok, in that order, George Lee. I hired George. At the time I had a very bizarre selection process. George came to me and, what can I tell you? he was this piece of granite that had yet to be chiselled or figured out by anyone else – it’s rare to find such an uncut person.  He came to me totally out of synch from the graduate recruitment cycle: “yeah,” he told me, “I kind of / should have done this earlier, much earlier, but I kind of forgot that at the end of university you are supposed to find a career”.

Some might call this complacent but all I could see was his immense mind quietly processing everything in the background. He offered me my very own perfect abstraction from the conventions of real life. So, I hired George Lee. I was probably drawn to those that no one else would hire but well done me because in this instance, George, who worked with me for nigh on 20 years was just an absolute intellectual rock.

Next, let’s have fun with Amsterdam commodities. And here is a question. What did I really do in Amsterdam on my research trip when I discovered the exotic charms of Amsterdam Commodities? Because I fear perhaps too much time was spent in the cafes of Amsterdam:  there really was very little factual evidence to hang your hat on in terms of why you would buy Amsterdam commodities at this time.

If my memory serves me right it made its own market in small exotic commodities like spices and nuts; it probably did what it liked, unencumbered by convention, no one was watching, I imagine it may have played around and brokered lots of crazy schemes; I hope so.

But remember in my head I had this crazy paranoid schizophrenic tension; the voices were saying there’s going to be a commodity boom. And it’s incredibly hard to find equity exposure because investment banks just present you the Zeitgeist of the last cycle and not what is very soon going to become the future.

At this very early stage in our thought discovery all we could find were strange creatures like Amsterdam commodities; I say strange, I mean to say that they had no website, no presentation deck, no sponsoring house stock broker indeed absolutely zero interest in the stock market or talking to someone like me which suited me absolutely fine. That really charmed me!

Why were they quoted in the first place, I don’t know? I remember they had a nondescript building; hard to find and decorated by the same Stalinist set designer as you find in the tv show, Chernobyl…lots of cigar-smoke infused browns. They didn’t want to have investors and they didn’t really share that much information.

Contrast this with the scene many years later, at the height of the commodity bull market in early 2008, with our investment in the Brazilian sugar company, XXX. I had travelled all the way to Brazil for the purposes of reviewing our risk positions there on the ground and the CIO refused to see me; you can watch this piece entitled “what happened when HH was kept waiting in Brazil”. Needless to say, it was not pretty – they say that you can take the boy from Glasgow but can you truly extract his thuggish tantrums? Through the glass divisions of the now very expensive HQ I presented my Blackberry on speed dial to my NYC broker as I ritually dumped our 3% holding in the company. Treat me shabbily; shame on you. The stock price fell x% that year; I think I was fortunate more than wise but then you never know?

But at the start of the bull market I was considerably more tolerant of such behaviour. I was building a centipede portfolio after all replete in eccentric smaller businesses that I wished to retain the right to change my mind and sell; I wasn’t looking for a marriage back then. I needed lots of little positions as my portfolio inhaled/exhaled the oxygen of early commodity price risk.

Amsterdam Commodities was soon to get its act together but back then you could buy it with an earnings yield of 13-14% – the business just threw off cash – and receive a 10% dividend yield. Cheap, it was.

Now then, is there something even better than great sex? I remember asking this question in a crowded hotel room many years later in Paris. I love the French because they just kind of get it; you could have heard a pin dropped as brows were furrowed and much philosophical contemplation filled the room. Believe me when I tried the same presentation at Breakers in Palm Beach, Florida a few months later the reaction was met with utter disbelief. It’s ok for Warren Buffet to refer to himself as an oversexed guy in a harem but not me? What gives America?

Spoiler Alert! I’m going to suggest that yes, there is something better: the notion of making 10x times your money from a stock. Imagine you bought something for 100 bucks, and it goes to 1000 bucks. Wow, that’s hard to beat and remarkably, such is the power of buying stocks at the beginning of a bull market that by 2010, some 7 to 8 years later, that funny old Amsterdam Commodities featured prominently in the top 10 Rock & Roll list of best performing stocks in Europe for that period.

What happened? Obviously, commodity prices trended higher; much higher. And then Olam, the very controversial Singapore based trader, flouted its high returns and consistency to earn the sector a substantial re-rating except of course that in Olam’s case it was a fabrication. Fortunately, Amsterdam Commodities remained true to its core beliefs and the business was untainted by the innuendos cast by the fraud in Singapore.

Today it probably trades on anything from 15x to 17x earnings and once you start attaching these ratings you’ve got to deliver. At that kind of valuation earnings must behave consistently and predictability. Amsterdam commodities is many, many wonderful things today, they even have a website and a welcoming investment deck, but it certainly doesn’t enjoy that predictability. So, I’ve probably cooled on the idea today. But was that better than great sex? I don’t know. But I remain thankful for the memories.

See you next time for Confessions Part Three.