The real Hugh Hendry is a world away from the outspoken, bombastic character with whom
investors have become familiar over the years.
Behind the sometimes prickly personality lies a thoughtful, introspective man who owns not
only his mistakes but everything he says, who has no problem with being told he's wrong
and why.
In my recent conversation with Hugh, at his home in St Bart's, he recounted one of his
biggest mistakes and the lessons he learned from what he called 'the arrogance and conceit
of a well-formed argument.'
And he explained the pure joy of creating a complex trade and daring to dream.
This is just a taste of what was an incredible and surprising conversation that will stay
with me for a very very long time.
Edinburgh was full of young, old men.
I wore a damn waistcoat.
Come on.
And we got these suits that, like, heavy heavy wool.
I wore one once down to London for a presentation and on the tube, I nearly passed out, it was
just, you know.
I got my, my big chance, I thought I discovered the...
So our big thing was, can you imagine you could find the stock that Warren Buffett buys
next, and I was sure I'd found it.
It was Reader's... it pains me to say, but it was Reader's Digest.
Clung on, and clung on and destroy all of the evidence.
So Reader's Digest, you know here's something where it'd been around forever.
Dee Witt and Lionel Wallace had set this up were unbelievably rich, and you were just
taking newspaper clippings, putting it together, and there are all these stories about after
the Berlin wall came down.
For so many people were trapped on the wrong side of the wall, except with communism, Reader's
Digest was like Coca-Cola; if only.
I really bought into the story that Reader's Digest was this iconic everything about America,
and I also had an investment in WD40, which was very successful.
WD40 the lubricant.
And 8, a Spanish person thinks its Spanish, a British person thinks its a British company,
and it was Water Displacement test number 40, one of the Nasa projects which worked.
I'd been to visit them, at their offices there's a broom cupboard full of WD40.
I bet the door opens easily.
So Reader's Digest was, I mentioned WD40 in that people... there was a Reader's Digest
UK, and so people identified it as being, they saw it as both being very much close
to their life but also at large it was an image of America.
0 input costs, just the license to print money.
So this is all before I meet Crispin, you know, and this is all before the raison d'etres,
you buy things that go up.
You don't buy things, you know this thing had IPO'd and been a complete and utter bomb,
and your concentrated portfolios had barely given, I saw 5-6% equity just... this is gonna
happen, guys!
This is gonna happen.
It was just one of those big, you know, they took it from the senior partners like we're
closing you out of this decision, this is the worst ever.
They kinda got the kinda Warren Buffett type thing but that was very very... that's why
I embraced Crispin, cause actually, I was then able to...
You had this fear to make 50%, you kinda, you just move on immediately, what is it like
to lose 50% in a position, that's the one you go back over again and again and that
Reader's Digest was one that I kept going back over again.
What did you learn from it?
I learned that the... how you become hostage to the clever, you can be hostage to the clever
narrative, that the narrative has to have the legitimacy of a downtrend.
That things don't happen just because you've come across some wizzy theory, and back to
that notion of inventory management, by all means come up with these ideas.
You know, monitor them.
But its the diligence and the wisdom to apply them only when they become relevant.
I mean, that thing, it went bankrupt.
You know, we were talking about, it was a business that... we were talking about the
music industry, and the music industry now is booming again, but Reader's Digest was
a business that had no future.
And I had no means, I had no warning signal in my intellectual little toolkit to take
me out of that.
So I learned from that the arrogance and the conceit of a well-formed argument, that was
my thing.
I always liked that sort of knifeblade at the back of my spine pressing on me, and if
I became complacent, you know the clients can take the money, but towards the end if
I was to devise a model with regard to remuneration or what have you,, it would be actually someone
saying 'I want you, I need you, if you are actually fulfilling the mandate, I need you
to lose between 5 and 10% a year' because, in this world, the way asset prices are I
can afford, I can give you 5% of my capital, less than 5%, and its basis...
But you have to be on correlated...
all those things.
And that was my disappointment, given that the remarkable low correlation that we had
and that we never blew up, and that we always retained this extraordinary convexity, like
if we were right with the thesis, it was important that we didn't have that patient, permanent
type capital, that just like, didn't want to know, that wasn't phoning you at the end
of each month saying 'what was the figure?
What was the figure?
What was the figure?'
You know, we're not here to have this prognosis of what's about happen in markets, but the
great challenge has never now been harder to diversify portfolios, I mean with regard
to the permanent portfolio, that notion of a little bit of everything, I just don't see
how you'd get enough of an offset if things really start moving.
So um, I could definitely have fun with...
I think we were discussing the... what's it like, making 50% or whatever, or what's it
like managing money, the great thing, the thing I remember most clearly was, it was
like a child on Christmas Eve, like when you create some of these convex trades and you
think 'what if we're right?
Just...
what if we're right?'
You're not the, oh my god we're going to make 10 million dollars, you never think about
that, just...
Oh my god, what if we're the...
I'm like that kid that calls it.
And all these cogs that turn the right way, that we've put them together.
And then, you know, it's, you meet these fascinating people and we're all trying to read material
and the wonderful Chris Cole with the piercing blue eyes, Artemis Volatility Trader, I think
he had a piece, I want to say 2012 maybe early 2013, the Volatility at the end of the world.
Which, I thought was just the best paper I ever read, just so many things went off in
my head, I find a lot of it hard to understand whenever there's all the Greek algebra but
again, you know, I just called upon my brain trust that I had around me, okay, like Jeremy
Irons in Margin Call, think of me as the family Labrador, "I want you to pitch this complex
trade to the Labrador."
Again, and again and again.
2013 we were flat, and it was a tough year but it was exciting, we'd conceived of a...
It was very much trying to create...
So, Chris was noting that he reckoned back-testing, you know, whatever with Vymar and the hyperinflation
that Volatility, that stock prices went up and volatility went up and there's no great
reason.
You know, it's the inverse with stocks ever since the 87 stock market crash, and other
asset classes that happens and it happens all the time.
So I was trying to conceive of a world where volatility could go up with stock prices going
up and the ramifications that that would have on the convexity of a position, and I mean,
you could have something that could just...
We were drawn to Japan because when we had the new administration come through in 2012,
and the three arrows etc, then the great excitement, you actually had a moment where Vol surged
higher as the stock market moved higher as the Nikkei went out, and so we'd conceived
of this, you know, that little desk thing you have with the beads.
Hedgey's Cradle yep.
And we were looking for like a very rough 2000 point move and the vol ramifications,
yeah I spent, it was very hard to try and explain the intricacies of what we were doing
so it definitely failed the complexity...
it was a complex trade, and that was ultimately it's failing, on top of that we ended up being
long volatility, long stock volatility, equity stock volatility in a world where quantitative
easing, where love it or otherwise, vol comes down.
But there was a joy, and that's what I miss, its that but what if we're right?
What if Santa comes?
What's gonna be under the tree?
It's the intellectual challenge of putting this puzzle together.