Herb Wagner – Opportunistic Value at Finepoint Capital (EP.460)
Summary
Investment in Japan: Herb Wagner discusses the institutional bias against investing in Japan, highlighting the structural changes and governance reforms that have made it an attractive market for Finepoint Capital.
Value Investing Evolution: Wagner emphasizes the shift in value investing from buying cheap stocks to focusing on misunderstood, mispriced assets with catalysts, due to technological disruptions and market changes.
Mentorship and Growth: The importance of mentorship in Wagner's career is underscored, with advice to find mentors, focus on learning over income in early career stages, and enter growing industries for accelerated responsibility.
Credit Market Outlook: Despite current low exposure, Wagner is optimistic about future opportunities in credit markets due to liquidity issues and structural changes, anticipating volatility and episodic opportunities.
Reinsurance Opportunities: The reinsurance market is highlighted as a significant opportunity due to repricing events like Hurricane Ian, with Wagner noting the attractive risk-adjusted returns available.
Global Opportunistic Mandate: Finepoint Capital's strategy involves a flexible, opportunistic approach to global markets, focusing on structural mispricings and avoiding markets where risks are not well understood.
Portfolio Construction: The firm uses a combination of quantitative and qualitative factors to assess return characteristics and position sizing, ensuring a dynamic and responsive investment strategy.
Philanthropy and Personal Interests: Wagner discusses his philanthropic efforts focused on global health, youth employment, and the arts, as well as personal interests in baseball and reading, reflecting a commitment to giving back and lifelong learning.
Transcript
I mean, one of the things that's fascinating about Japan is most experienced investors, so most people that you know have some horror story about investing in Japan, right? And so, and so when I started getting into it, what I realized was people don't like investing in Japan. There's a real institutional bias against it. [Music] Herb, great to see you. Thanks for having me. Why don't you take me all the way back to your upbringing? >> I grew up in a small town in southwest Ohio, Beaver Creek, Ohio. My mother was a teacher. My father was uh drove an oil truck. You know, when I look back at that time, the most formative thing to me was the fact that my parents really believed that we should have jobs. We should be working when we were in school. So, if you ever wanted to buy something, you had to make money for yourself. And so, we were really encouraged to have jobs at a very young age. And so during that time, you know, I was started out as a paper boy when I was 11 years old. I remember, you know, I really the kid that had the paper route was like the only kid in the neighborhood had money. And so when he ended up quitting, I really wanted that job. And so I was 11, you had to be 13. I begged my parents. I begged the paper company to let me do it because it was a route in the morning. I had to wake up at 4:30, had to deliver newspapers every day, 40 newspapers for an hour. But I was able to convince them to do that. And so, you know, as an 11-year-old, you're running your own business. So, you're you're taught responsibility. You know, whether it rains or snows or sleeps or has a blizzard, you have to get up and deliver the newspapers. And then on the weekends, you have to collect for the newspapers. So, you know, you buy the newspapers for 65 cents, you sell them for 90 cents. If people don't pay you, that's out of your pocket. Um, you know, I learned early on that my I had a brother who was 5 years younger than me who was super cute. And if I brought him along, he actually got we got better chips. I'd get candy. I get more I get better tips. And so I used to always haul him along whenever I collected for my newspapers. And so but it teaches you responsibility. It teaches you you have to show up. If people don't get their newspapers at 4:30 in the morning, they're not happy. And so um I did that for 4 years. You know, the thing I also remember at that time was, you know, I used to think to myself like when my friends are sleeping, I was out hustling. Some of the other jobs, so you know, I worked as a bus boy. That was a that was a pretty tough job. But I I will say like, you know, you learn how to deal with all types of people. So if I'm at the golf course and I'm catting and you have an angry CEO who's um who's having a bad round or you're in a restaurant and you have a customer who's really unhappy, like you have to deal with those folks. And I also learned like one of the things I really remember was that I learned that there's a lot of really hardworking people in our economy and that that get up every day and bust their butts and you can't support yourself. And when I was doing that, I remember thinking to myself as someone who's in a small town, like I want a lot more. Like I have to focus on my education. Like that's the only way that I'm going to achieve the goals that I really want to achieve. >> As you went through school, what was the spark that turned you into finance and investing? >> When I was younger, I would say, you know, I had a lot of interest. I played a lot of sports. I worked a lot. But it wasn't really until later in high school and then when I got into college that I really like there was some spark that really just forced me to focus on my grades. I remember my mom was like super proud of me like and that was like a huge spark for me like wow I did something my mom was so happy she's been a huge influence in my life and so that was a that was a big spark and then once you start doing well you know the kind of you get good grades that feels good you get good all types of opportunities and so it really builds on itself >> what was your first job in the industry >> so 1990 I graduated so I went to Miami Ohio as you remember there's a pretty big recession back then so I had a finance degree. I had an accounting degree. Always wanted to do investing. Didn't know a lot about it, but I was always intrigued by it. So, but at the time, Wall Street's firing people, um, blame people off. And so, I didn't have the opportunity to go to Wall Street. My very first job was working at Pete Marwick as an auditor. So, and I remember like from the first time I started working and the one thing that I vividly remember at that first job is that you know like I felt like I've always felt like in life like I was running a race and because of my background because of where I grew up like I was starting this race way behind the starting point. And so for me the only way to get ahead was to work my butt off. That's and so I I've always had this mantra that nobody was going to outwork me. And so at my very first job um I worked as an auditor you know my peers are working 40 50 hours a week I'm working 80 or 90 hours a week and got you know got promoted very very early as part of that what I also remember be befriend befriended somebody and I saw their career they're five years ahead of me and I saw what they were doing and I said I don't want to do that and so I took a risk I left Pete Marwick and actually went to go work for first Chicago which was really my very first investing job. >> What did you do in that first role? I have to say like, you know, I've had a lot of really good fortune in my life, but one of the most fortunate things was I ended up when I was at the bank, a position opened up uh in this group called Distress Debt Trading. And so what this group did, and this is back in the early 90s, and what this group did was when the bank had a loan that went bad, they would just sell it. And so this group used to do the selling of the loans. There was a woman who used to run the group named Gene Lrand who actually was one of my one of my very first mentors who they figured out like we're selling these loans for 20 30 cents on the dollar and the buyers are recovering 70 80 90 cents on the dollar. Like at the time there was a very small universe of people who bought distress loans. You had Samzel, you had some of the Drexal spin-offs, you had a group of Fidelity, but it was a very small there was probably 10 people that we were trading these loans with. But the bank figured out, wow, instead of selling these we actually should be buying these loans. And so they were one of the very kind of pioneers in distress debt investing that figured out they had old workout people that were in the group. So they had the expert the bankruptcy expertise, they had capital from inside the bank and uh and so we were we were instead of often buying these loans from then when they were going bad, we actually were going out learning about what the recoveries are going to be and then we started buying loans from other banks and we actually built a pretty good business during the early 90s doing that. And so, you know, at the time I didn't know that was going to be my a big chunk of my career. I didn't know that was going to be an exploding asset class. I didn't know it was going to be nearly as profitable as what it was. You know, back then we used to, you know, we used to value every company at four times cash flow, every company, and you'd buy them at two times cash flow, right? And you would make gobs and gobs of money for many, many years. One of the things I learned from that job was that um like I I I've always believed in finding mentors and also mentoring people. And so so I had been the benefit of phenomenal mentors throughout my career. I mentioned Gene Lrand, one of my very first mentors. Um but but throughout throughout the years I always would go to people that I respected and I say, "Hey, do you mind if we grab coffee or grab lunch once every couple months? I really respect you and I find you to be very insightful and I'd love to pick your brain on issues. And so and so over time by doing that I just got to meet a lot of great people but also got phenomenal guidance for my career and then over time I ended up mentoring people and so and actually I think being a mentor you actually learn more than being a mentee. So, and so, you know, I so often young people will say to me when I meet young folks, they'll say, "What advice will you give to us?" And I always tell people, I always have three pieces of advice. One of them is like, "Find find a mentor. Just ask somebody." Most people will say yes. If somebody says no to you, they're never going to be a good mentor anyway. So, that's fine. I also tell people like don't worry about how much money you make when you're in your 20s. Just does it doesn't matter. Just just take a job where you can learn, you can grow, you'll get good at it, the money will follow. But I find there's just way too much focus on people trying to maximize their income at a point in their career that it really doesn't matter. And the third thing I say which I was a ma I was a huge beneficiary of was was get into an industry that's growing a business an industry or something that's growing because if you are you like I think about distress debt investing when I was when I was in the in the early 90s but if you're in an industry that's growing like a weed you get so much more responsibility faster. you learn, you become a pioneer with very little very little amount of experience and so and so uh and so if you can do that there's like tons of tons of great things fall from it. So I was an early investor in distressed debt you know I was early when I went to Appaloosa when I was early when I was young as well and that was one of the kind of first larger hedge funds that existed and so and that whole industry ended up exploding. So I've been the beneficiary of like these massive tailwinds behind me. Um and so that's another thing I always encourage folks to do. When you were in that first role, you had a great mentor. You were in a growing space that was doing really well. What led you to leave? >> I loved the job. First, Chicago offered where you could actually get your MBA at night and they would help finance that. And so, and Chicago is a great city where you actually both University of Chicago and Northwestern have night programs. And so, so I was working during the day. I was getting my MBA at night. Actually, funny enough, I met my wife uh during my MBA and we've just passed our 29th year anniversary. So it's fantastic. So you meet great people, but you know I was working a lot and I think I just for me like I I looked at the bank and thought like there was a cap to what I could do there and there was a lot of smart people that were in front of me. The the group was highly successful. Um but I once again I wanted to learn. I wanted to learn okay not only what they were doing I wanted to think about different asset classes think about different parts of the public markets. I wanted to grow to be a great investor. I was there for four years I think and that was I feel like I learned a lot but I just had a thirst to learn more >> and where did that take you? >> So when I graduated with my MBA um moved moved to Boston and so I ended up like my my next so I ended up first went to Putinham and then I was there for a short period of time and then I got a call from Dave Tupper to go go work at Appaloosa. So so another incredibly fortunate thing Ted for me is I've I've worked for two of the best investors of my generation. right? Dave Tapper and Seth Carman. I mean, it's incredibly fortunate. Like, I did research on both of them before I went to go work for them, but I had no idea how talented either one of them was and how successful and how much I learned from them as well. So, so I went to Appaloosa and uh I went to go work for Dave and I mean, one of the things I learned from Dave, like Dave is one of the most Yeah, he's a incredibly talented investor, but he has a he has a nose for opportunity that I've never seen before. like he is like a moth to flames in terms in terms of um trouble risk changing pricing changing. I mean he look can look at any asset class can really understand the fundamentals. You know when I was there with the when we had the Asian financial crisis we great we found great opportunities there. I was there during the Russian default back in 1998. But Dave had this ability to traverse multiple markets think incredibly sharply and simply about macro risk. And when there was massive dislocations amongst fundamentals and prices, he would really jump in, price assets, learn how investors were thinking about them, and be very aggressive at the right time. And when there wasn't great things to do, he would do nothing. And so, you know, when I think about the variety of things that we did there and the variety of areas that he's been successful in over time, it's very, very unusual. So, I felt like like I learned a I felt incredibly fortunate to have worked with Dave and to have learned from him and to watch him invest. >> When you think about the Appaloosa style, the bowpost style almost opposite ends of the spectrum in terms of risk-taking. What did you see say first at Appaloosa and seizing that opportunity when it's there? Appaloosa has more volatility than what Bowost does. So Bowpost has a very risk very robust hedging program just much different culture of the organization. more diversified in in terms of what they owned. And so Dave tended to be a lot more he was a lot more concentrated, a lot more aggressive. Um, and he didn't mind wearing volatility. I think that was something that he was very comfortable with. And you know, at Bowpost, it was also a value strategy, less trading oriented, more just really fundamental fundamental based. There was there was some private assets that they were doing as well. But you're right, they're two incredibly talented people with really different investment philosophies that have both been just incredibly successful. How did you go from one to the other? >> I got a call from somebody who knew Seth who said Seth was looking to add to the team and I remember my wife and I went and had dinner with Seth down when I was in New York and we just really hit it off. Like Seth is a incredibly kind, thoughtful in, you know, crazy smart, phenomenal investor. Like he was willing to mentor me. He was willing to invest in me. I felt like he wanted to he loved investing and he wanted to do it for many, many more years. And there's there was phenomenal people there that I got to met got to meet as well. So you know, sometimes you just meet people things just click. And when I met Seth and spent time with him, I was like, "Wow, I can really learn a lot from this guy and I can I can hopefully become a you learn how to become a good investor from him." And so, and then we were off to the races. >> What was different from what you might have anticipated in that style of investing when you got to Bowpost? >> The first thing that jumped out to me was you'd walk in during the day and it was quiet and everybody had their heads down. Everyone was reading, doing research. And I remember thinking to myself like, "Wow, this is a research organization." Like they're investors, but they're really researching incredibly deeply what they're doing. As you start to understand the BOP's philosophy, like they're really trying to understand situations that they're in better than anyone. They bring in outside resources. They're incredibly smart people. Um, they're very long-term oriented. Like I I always say to people like everyone thinks they're a long-term investor. I think less than 5% of people are truly long-term investors based on my experience. and but they were truly long-term. And so, you know, the model there was really hire great people. Seth would mentor you, give you resources, um help you invest, be be invest alongside of side of you, and then as you did as you did better, you'd get more responsibility and you'd hopefully grow and have a bigger impact. And so, um that was very refreshing to me. It was a culture of intellectual honesty, of trying to get to the right answer. But at fun fundamentally I thought about as as a research researchoriented firm. >> If you take the call it high level investment philosophies of the two firms how did you think about what was resonating most for you >> into different cultures, different environments, different styles. >> Yeah. Yeah. So the thing that's unique about Dave Tupper is I don't know many people who have been as successful as he has in multiple asset classes. Right. I mean he started as a high yield bond trader. He did a lot of distress debt, did a lot of credit, but then he did a lot of emerging markets, did a lot of sovereigns. And now when I listen to Dave talk, I think about him as being a macro investor. I mean, he has incredible insights on, you know, almost any any market, rates, currencies, etc. And he's been successful like in all these different areas. It's very, very unique. Very unique. Seth has also been successful across a lot of different asset classes. I think for me what it was is I looked at myself more like more more like Seth than Dave. Like Dave has a very unique talent but when I was at Appaloosa a lot of it was feeding information to Dave Dave making decisions. I wasn't sure I could ever be like Dave working at Bowpost because the Seth mentors folks I just thought that I could develop and grow a lot more under that structure and you know the research orientation um the long-term orientation it just struck me as something that I could be more successful. It just fit more with my personality. >> How did that play out over your years at BPOS? >> I started as an analyst. I ended up growing, you know, kind of rising through the ranks over the years. And the the model of how Bow Post invest, I think, is actually very similar in a lot of ways to how fineoint invest. And so, you know, I was I was at I was at Appaloosa for a couple years. I was at Bowpost for 14 years. Clearly, the DNA of BPOS is going to rub off me a lot more just because of that. it was a better fit for who I thought I was as an investor and how I like to invest and how I thought I was going to be successful. >> I'd love to ask you about two aspects of the evolution over your career into fine point. Generally speaking, value investing and credit markets where you kind of started. Value investing has had a tough slog over the this last 10 plus years. How do you think about what it means to be a value investor and how you try to go about it? >> When I think about value investing, to me, what I think about is really trying to find misunderstood, mispriced assets in a whole variety of markets. And you know, it used to be back when I was just getting started, it was buying cigar bots like you know, like Warren Buffett and Benjamin Grant used to talk about. So for me really what it's about is was more about identifying areas where there was structural mispricings going up and actually doing fundamental work and valuing what securities or assets are worth in these areas. And then when you can when you can when you can value them and you can buy them at a big discount to that and there's a catalyst to help you realize value you do it. And when there isn't then you don't have to invest. And so when I think about the different areas of what what I've done over the years of what I've worked on, it's pretty broad. It's uh you know like take for example um you know we did a lot of stuff with um you know started out doing credit high yield distress and then we ended up you know moved into structure products did a lot of stuff in South Korea for a number of years Japan you know then we ended up moving into reinsurance and and and uh and you know different credit derivatives. So, it's a pretty broad mix of of products, but I think the common denominator is it's it's out of favor. Um, it's it's hated. There's a something you can have a view that's different than the market. You can understand why it's cheap and you can have a view for what it's worth. And sometimes when you can buy things at a discount to that and and there's a catalyst and you go ahead and do it. When I think about traditional value investing, to me that's um buying cheap stocks, you know. So to cheap on book to you know price to book cheap on if enterprise value ibida what's interesting is when I was years ago we did that we did a lot of that and that used to that would result in good investment returns I'd say probably about 10 or 12 years ago that stopped happening like what I found was we were buying situations where we have a differentiated view that were trading at a big discount to what we thought they were worth based on the metrics we had always used historically but what was happening was our underwriting was correct stock stocks would go down. And so that was happening over and over again. Underwriting, correct? Stocks go down. And so we ended up pivoting a number of years ago like we don't want to have be dependent upon what the market tells us something is worth. And that's why a lot of what we do is catalyzed. So um so that was one of the big I'd say I would say huge change that I made in my investing style probably starting about 10 years ago was not buying things just because they're cheap but really looking for catalyst. And what's fascinating to me as well is, you know, the other thing that I think one of the reasons that that value investors have underperformed I think in the last 10 years is that there's a lot of technological disruption that's taking place and it and it takes place faster than it used to. And so, you know, if I look at when we underwrite a mediocre business and we project out cash flows, if I go back and look at those, which we often do, the decline is always often faster than what you think it's going to be. And so I think that's the curse of the value investor is you know buying mediocre businesses at cheap prices that has not been a good strategy. And so luckily we realized that years ago and we really pivoted away from that as part of our strategy. >> Are there any other significant changes from your thinking about value investing over the years? >> The other big one is is how I value the leader of an organization and mostly a CEO. So I would say the value that I give to leadership is significantly more today than what it ever was in the past. And this actually applies to CEOs, but it also applies to leaders in the government or if I'm trying to do something with a not for profofit. Um how a leader can influence an organization and what type of impact they can have. The way that I weight that in an investment or when I'm thinking about partnering with somebody is significantly more than what it ever was in the past. And I think I think that's just through a lot of bumps and bruises and over the years and a lot of investments. When you invest with great leaders, good things like you're always surprised on the upside. When you invest with, you know, with mediocre leaders, it seems like you're always surprised on the downside. And so that was a big that was a big, you know, that was a big change as well. >> How do you assess the difference between the mediocre leader and the great leader? I think it's through a lot of experience and is spending time with a lot of different types of people. So the way that we have found is best is by um is by finding people who have worked with him who have a you know have a positive or even a negative impression of them and if we get a lot of that data. Yeah. The other thing I often will do is often I've been doing this long enough where um if I'm looking to invest in a company um I might I probably will have a friend who I've known for a while who also knows the individual that we're looking to invest in. And so you know being able to call people who I trust and really ask them how you know kind of how they think about a specific leader um you know that that has been that has been helpful as well. But I also think the third thing too is I think that you know it's it's what people do not what they say. And so it's really you know it's really rolling up your sleeves and looking at their history looking at what they had done looking at their data. So often what I do today I'm probably more reliant on the numbers and like what people are doing the actual facts or that's what's in front of you less so than just sitting down with somebody and having coffee and walking away and saying boy that guy is trustworthy. and the other credit markets, right? You started buying loans at two times cash flow and selling them at four. The world's changed a lot since then. How do you think about the credit markets today and how that's changed? >> So, I have been a credit investor most of my career. I've invested in a lot of different pockets of the credit markets. It's clearly a lot harder today to invest in credit than what it was when I was first inh working at First Chicago. So, we do keep a very close eye on the credit markets. Um, I do think even though as as it we're sitting here in the summer of 2025, our credit exposure is at historic low levels, spreads are tight, there's a lot of capital and you know when I look at where new issue is getting done, how there's no covenants, you know, now in credit you have these LME fights that are going on, these knife fights between creditors that's really eroding value or can erode value or could be an opportunity. Um, so there's a lot of changing dynamics that are happening in credit right now. However, I do believe like credits have credits have been historically pretty volatile and I think it's for reasons because you tend to have money coming in in and out of those markets um especially during times of stress. I am very excited about the credit opportunity set for the next 3 to 5 years. We don't see it right now, but if I think about the dynamics of the credit markets, there's a couple things that jump out to me that kind of that say to me this could be a really great place to invest. So number one, you know, the number of assets in the credit markets that are that are held by vehicles that offer daily liquidity is growing dramatically. So mutual funds, ETF, passive vehicles. So the percentage of those funds, those percentage of the markets assets that are held with those vehicles continues to grow. Number two, the credit markets are not there's no there's not a lot of liquidity in credit markets. And so when when when retail investors or people decide to pull money out because the dealer community in in credit has you know capital's down by 90 plus% over the last 15 years or so. The price movements that you see in credit tend to be ve very severe when there's a shock to the system. It used to be you had weeks or maybe a month to buy something but now you have days because the volatility is so great because of this because of the fact that you have money coming out for selling. dealers don't really have the capital to absorb it and so you have a so you tend to get a lot of volatility in credit. The third thing is I'd say a lot of our competitors have moved to doing private credit. When I look at what's what's going on in that market right now, it strikes me as pretty competitive and not really a great place to find attractive riskadjusted returns. And it's never been through a credit cycle as you know. So we don't really know how private credit is going to perform when when things don't go well which will inevitably happen. we'll have a recession at some point. And so, but we've had a lot of our competitors who on the public side just aren't doing that anymore. And then the last thing I'd say is the markets are enormous. The credit markets continue to get bigger and bigger. At some point, you'll have, you know, you'll have an SBB happen which happened in 2023 when you had a run of the bank, right? And that that thing that thing un kind of came together and or that whole thing collapse in over maybe a couple days or a week, you know? So, you had you had Credit Swiss that had a very quick demise. And so I do think you know there'll be a lot of things that will happen episodically that will lead to opportunities. The telecom space was a mess last year. We found things to do in telecom. But fund business fundamentals will change. We will see volatility. There'll be a horrible hurricane that hits, you know, Puerto Rico or some area that will cause bond prices to change a lot. They'll there'll be a big financial fraud. Like I joke around like we haven't seen a good financial fraud in a long time, right? But I've seen a lot of those in my career and I think we'll see we'll see those going forward as well. And so that will lead to good opportunities. If I go back to my example of 10 people used to do distress investing back in the early 90s, now I don't know the exact number, 500 to a,000 is some huge number. And they're all smart. And by the way, in the early days, we used to be the only ones that would hire bankruptcy lawyers, financial adviserss. So we had this real edge. And that that actually lasted for probably last up until the last 10 years ago. Now everybody hires the best bankruptcy lawyers. Everybody hires the best financial adviserss. So it's it's hard to it's just hard to get your edge. And then if I think about the other stuff that we're doing and it's just it's it's the opposite end of the spectrum. It's differentiated. It's not competitive. And so those are the things that we always gravitate to. So as we dive into that and what you're doing when you bring to bear both the experiences you've had and then these perspectives about how value investing, credit markets and other things have evolved. Um how did you lay out what it is you're trying to do at Finepoint? We're really trying like ultimately we're trying to compound capital over a long period of time. >> Sounds good. >> The way and the way we do that is we have an open mandate. So our our clients have given us a lot of trust that we can look across a lot of different global markets and we can look for areas of structural mispricings. We go in, we underwrite assets and we can buy things cheap with a catalyst. We'll do it and we can't we'll move on. I feel like our job is to find really attractive riskadjusted ter returns. Um, and we have a global we have a global mandate to do that. So, and I'm also a big believer like we don't have to know everything. Like often people will say, "Oh, what do you think about European stock market?" Like I don't really know a lot about it. I don't follow that closely and so I don't really have a view. We have this saying here that, you know, investing you don't get paid for difficulty points, right? It's not like diving where the tougher the dive the more the higher your score. For us, like we that doesn't exist in in in markets. And so for us like one of the things we try to do and I try to do is really have a sense for okay what can we know where are assets priced where is there a lot of stress where are there problems as a big event happened that's maybe caused people to run away from a market and then you know can you really understand is that a is that a risk that you can really understand. It's important to know what you know but it's more important to know what you don't know and I'm a huge believer in that like that's really stuck with us. We look at a lot of odd things. Um, and you know, you have to ask yourself, can you really understand the key risk? So often you think you can, but you can't. And so that's something that we spend a lot of time on. So we look at when we're looking at a different market or an opportunity, that's a key question that we're always asking ourselves. So when you have a global opportunistic mandate and there's a lot of things you don't know, how do you figure out first what you're trying to canvas to then learn enough to know when you want to dive deep? So for us like so it starts with really just generally have an understanding for what's happening in the world and some of the key markets that we that we see potential opportunities. So we're looking for areas that have been volatile, areas that we things that we can understand that we can underwrite. One of one of the areas that we have gravitated away from over the years is take emerging markets for example. So you know the the sovereign risk the macro risk often are the most important risk in any asset you're looking at in a specific emerging market. So we don't think we're good at that. We haven't had a lot of great um we just haven't had a lot of great reps. Um, years ago I would say I was better at that, but I think the uncertainties have grown over the years. And so also take for example, you know, when the Chinese property developers all blew up, when Everran blew up back in 2023, we spent a lot of time trying to figure out, we spent a lot of time trying to figure out could we understand the risk, we ultimately decided we couldn't, you know, because so much of it was dependent upon the government and also so much is dependent upon the accounting and how the banks treat these these different developers and it was very hard to get really good insights on that. So, but more importantly, so there's there's a number of markets that we keep a really close eye on. Every component of the of the credit markets we are laser focused on. If I think about Japan, like Japan was something I had looked at every year for a long time, but because of these changes that started to take place in 2014 and 2015, then we actually started investing. So, you know, I was an investor in South Korea for a very long time and that was that was something that we know well. Um, so a lot there's there's a there's a there's a sec there's a number of markets that we have exhibited a lot of the characteristics that we look for that we have a lot of relationships in that we talk to talk to folks in a pretty regular basis. So we're keeping a close eye on. So when something happens when you have you when you have an event like for example 2016 when oil prices collapsed like there was certain components of the credit markets that got really attractive during that time and so you know we had we knew the companies we've invested in that area so we were able to take advantage of that you know when you have when you have you know if you have another if you have a geopolitical event for example you know like for example when you had you know when Greece essentially defaulted and they default almost defaulted a time like you know you have these big events that happen and you run to them and you say to yourself can we under can we underwrite this risk and is this risk attractively priced so it's funny I what I found over the years from the outside I think it seems overwhelming because there's so much to look at but when you're in the inside and you're like making the sausage and you're sitting around a table with your colleagues and you're going through what's happening in the world and what's how assets are being priced in a in a specific market and is there a catalyst and can we have conviction it actually becomes very clear >> I'd love to dive into the example of Japan You said you looked at it every year, but then about a decade ago, you decided to start investing. What was the reason that you first said, "Okay, now is the time to get involved." As a value investor, you know, I've had numerous friends and folks who've gotten excited about different Japanese opportunities once, twice, three times a year. Before Finepoint, I really never had invested in Japan. So, you know, we roll up our sleeves. We do work on these companies and we generally always found the same problem. Great company, cheap price, poor governance. You know, they were accumulating a lot of money and the money was sitting in the balance sheet. They weren't reinvesting it and so they weren't creating value and also disclosure was difficult, the accounting was difficult and so and so we it fell into the category of you unknowable. So, we ended up not investing. So the big change that happened was, you know, 2012 when Shinszo Abbe got came into his second term as prime minister, he started to recognize that when you have these great companies that are generating fat profits and all this money just sits on the balance sheet of these companies, they don't do anything with it. It's actually destructive for the economy. And so he was really in kind of ahead of his time. So in 2014, he came up with a corporate stewardship code. in 2015, the corporate governance code. So, the corporate stewardship code was a was a was a was a kind of a a roadmap for asset managers to hold companies accountable for better governance. The corporate stewardship code was telling the companies what they should be doing. It wasn't mandated. It was more here's some frameworks what we think you should be doing. So, we saw that and we said, hm, that seems really smart. you know, this is a market that seems ripe for that type of movement or that type of uh action. Let's see what happens. And so, you know, in the subsequent years, we kind of started keeping a close eye who was adopting it, who wasn't. You know, we started to see we started to see dividends increasing. We started to see share buybacks, selling at some cross share holdings, you know, a very at a very minor level. And so, over time, we really rolled up our sleeves and said, "Hm, is this is this time different? Like, are these changes really going to stick?" And do ke do do investors care about them? So I mean one of the things that's fascinating about Japan is most experienced investors, so most people that you know have some horror story about investing in Japan, right? And so and so when I started getting into it, what I realized was people don't like investing in Japan. There's a real institutional bias against it. you know, you had a big asset bubble that exploded in 1990 and this has caused a lot of pain and there's a lot of people just have a bias against it. So, second thing I learned was, you know, people would say to me, oh, there's so much sovereign debt in Japan. Yeah. And there is there's, you know, debt to GDP for Japan is 250%. That but but the central bank ends up owning a large chunk of that debt. So, the actual net numbers a lot smaller. Japanese interest rates are lower. But what's fascinating about Japan, I think what people miss is that when you're when you're looking at the leverage in an economy, you have to look at every level. So the Japan sovereign leverage is high, but net of the central bank is actually manageable. The banking system has is well capitalized now. Corporates in Japan and then households, I mean, they all had they're all net cash. And so households sit on massive cash balances. They generally don't like to invest in the stock market. So if you look at the economy collectively, it's actually it's actually not that levered. You compare that to the US for example, the US has, you know, our sovereign debt now is getting close to 100%. Our banking system is well capitalized to similar there, but our companies have a lot more debt and individuals are very levered and so and so for some reason there's a bias against Japan because of this one number which we just didn't think was told told the whole picture. So when you go to dive deep on Japanese companies sitting in Boston, you have cultural differences, you have language differences. How do you get up the curve to the level of depth that you would want to take significant position? >> So you are exactly right. The barriers to invest in Japan are enormous. So the cultural barriers are huge, the language barriers are huge, the accounting is different, the time, you know, the time zone is different. I mean, I can't tell you how many times I wake up at midnight or 1:00 for a telephone call, you know? So, it's it's tough. It's difficult. And so, so when we first, we probably spent over a year underwriting Japanese companies, spending time over there, understanding all of this, you know, before we made our first investment. So, you know, if you fast forward to today, we have five people on our Japan team that speak Japanese. And so we understand the accounting, we understand the cultural differences between the two. You know, I I was I was always amazed when I first started going to Japan. We'd we'd have investment meetings and we'd have my we'd have the Japan team and we'd go in and I'd come out and I'd say, "Wow, what the guy just told me was A." And the Japanese guys were like, "No, no, no, no, no. He wasn't saying A. He was saying B, C, and D." And I was like, "What?" And so what you realize is they communicate in a totally different way. You know, relationships are very important in Japan. The government is very important to Japan. You need to be on the right side of the government on every investment that you make. That's very important. The government, I tell people, is the biggest activist investor in Japan. Like the other the other barrier I always hear about people in Japan investing in Japan is they'll tell me, "Oh, the demographics are a disaster." Right? I mean, the birth rate is low. Everyone knows that. The death rate is high. There's very little immigration. The population is shrinking. All true. What the government's figured out is because of these demographic challenges, they need to attract foreign capital. And so they have been doing a lot to try to make it easier. And so what's interesting about Japan is you have you have this tailwind of governance reform that's actually being led by the government and being adopted by a lot of a lot of folks. And so to answer your question, when we go over there and we actually, you know, how do you how do you underwrite a Japanese company? We're not trying to invest in the market. We're trying to find people and most CEOs boards who really understand the benefits of better governance. So we're not activists. We don't push people to do anything. For us, if we if we buy stock and we meet with them and then we don't like what we hear, then we just sell the stock and move on. So So what we found in the early days is is there was there was companies that were starting to adopt these changes. And when they started to adopt these better governance changes, the the opportunity is massive. So, think about a companies for for 50, 60, 70 years that always paid low dividends, always held on to their earnings, had massive cross shareholdings, owns all their real estate, has no leverage at all. And so, if you start to get them to say, "Okay, let's think about your cost of capital." The way to reduce your cost of capital is to take a little bit of leverage out at 1% or less, recapitalize your company, maybe buy back some stock, or maybe reinvest or buy or reinvest in a growth business. The heart of the opportunity for us is there's very few people like us over there. So Japan is still most global long only managers most asset manager underweight Japan still I believe I've never seen I'd never been able to kind of exactly quantify this number. I think almost or over 90% of the market is passively managed. So there's very very few fundamental bottoms up investors in Japan. So when we go in, we roll up our sleeves and we engage with these companies, other people aren't doing that. And we can really have a differentiated view with every investment that we make. We spend a lot of time with these with these companies. Um, you know, it could be years before we actually make our first investment. And so, you know, we like to we're not going to invest just by what they say to us. We need to see them start to do things. And so, and what's fascinating about Japan, you know, they because these opportunities are so big, you could see them do things for years and stock prices don't react at all where we can actually gain conviction on what they're doing. And as we started making these investments, what we figured out was um the companies that were making these changes, the stock market was was recognizing the increase in value, but generally not until the seventh or eighth or ninth inning. like once they started seeing the benefits of a lower cost of capital, higher margins, selling off, you know, bad businesses, reinvesting those businesses into growth businesses. Once you started seeing that and the numbers, that's when the Japanese market started to get excited. So we kind of saw that and really started engaging and figuring out who is where where are these ch like who's serious about these changes and so and luckily we've been doing it like we've been doing it for nine years now because we need to see a lot of tangible change we need to spend time with people to really understand do they believe this like if you look at 20 years ago there was a big push for activism in Japan that largely failed today the market is ready for it so if you accelerate if you look at it today these reforms are accelerating. The government continues to push hard. Companies that make these changes, stock prices go up and um and everybody wins. And so we we feel like we're part of this revolution that's taking place. We're helping steward companies. We're helping helping them realize a lot of these positive benefits. And so that's the core of our of our investment efforts. within that broad group of companies making significant governance changes, have you found any either sort of substrategies or sectors where that has been more prevalent than others? >> The answer is yes. And so what's what's interesting about Japan is typically when you see a company in an industry start to make significant changes and in their stock prices go up and they start to reap the benefits because now they have excess assets to to buy grow other businesses. What happens is you other start to see other people follow in that same industry. IT services for example where there's been a few companies like Hitachi was really one of the leading companies in this area. So they started making a lot of these changes and really started to you know sell off listed subsidiaries sell off excess assets reinvest in growth businesses. I mean the stock price has been has done tremendous. And then other companies like to follow as well. And there's some industries that are kind of I'd say that are very slow to change and they really haven't they haven't haven't adopted the benefits of better governance. I would say you know I don't exactly know the how what percent of companies are actually taking positive action but it's a well less than a majority. I think eventually most companies will do it but this is still I mean we're still in the infancy. I'd say the last few years have you've seen a lot more of an impact than the than the five years before that. So I think that's really positive. But there are there definitely are industries um who you know because there's a leader because there's someone who champions the cause that a lot of other people see the benefits and then they follow. So you mentioned that you don't participate as an activist investor but the time may be ripe for activism. How have you looked at the behavior of activists and companies in your investment remit? >> We would rather find great companies and great management teams. I'd say today what we have found is you know 20 years ago I don't think people understood what the activists were doing and why and what the benefits were. Now I think the market really understands okay you know there's an activist who's going after who had who bought stock in a company that has massive cross shareholdings huge cash balances owns all their real estate very bad margins and so investors say wow that's an opportunity and so if there's an activist that gets involved what you see today is there's a lot more support they say oh you know everyone is doing this this is really good for the market it's good for society and so there's like there's there's buy in amongst the asset management community there's buyin amongst the government and so when you start to see activism take positions and advocate for change kind of everyone piles in behind them so now there are sometime there are instances where you still have companies that fight them really hard but but just the kind of the culture around activism has just it's really changed um and it's and I think it's because people see the benefits of it I think that um and so I think that's for the biggest reason >> and you started investing in Japan a decade ago and have continued since you built up your team. How have you grown your exposure in thinking about the riskreward to where you are today? >> So you when we first started doing it back in 2017, it was a new market for us. There was a lot of changes that were taking place. We weren't certain. Our relationships were newer. So it was it was a smaller part of what we did. Um, as we as we did it more and started having more success and the underwriting the things that we were underwriting were actually happening, stock prices were trading to what we thought they should, events were happening that we thought were likely to happen. So, as we had more and more success and we also, you know, we we built out a great team who manages the effort. So as we got more more confidence in in the team and what they were doing and how they were engaging, you know, the the the exposure continued to grow and then if you fast forward today, it's a very large exposure for us. People ask me all the time like how much longer will it last? And I really feel like I mean Japan I think is the third largest equity market in the world. Minority of companies have actually gone through these changes. I think you I don't know if you're in the third inning, the fourth inning, the fifth inning. The number of people investing in Japan really hasn't changed that much. So what's fascinating to me too is you know we've had success others had success you know asset management is competitive like you think when you see firms that have outsized returns you'd have a flood of folks running to to run to a place but it goes back to the barriers to entry the barriers entry are high I remember the early days when we invest in Japan you know you have to you know you you when you go to see a Japanese company you have to go through a process you have to go through the junior IR person then the senior IR person then like the controller then the head head of accounting and then like the head of accounts payable and like maybe you'll get to, you know, the treasur and the holy grail of the CFO is like maybe six years, you know, five years later you get to the CFO and the CEO would never meet with anybody. We don't always go straight to the top, but often we do. But we have a reputation that we've developed over there where people trust us as stewards. They trust us as as investors. They they they know that we're doing things for the right reasons. We're long-term oriented. And so that, you know, so that's really a big difference today than what it used to be. So, but I'm I'm very excited about our effort there. I'm really excited about the changes that are taking place as well. >> What are some of the other opportunities that excite you? >> So, I'd say there's two other things. I continue to be really excited about the credit opportunity set for the next three to five years for the reasons that we discussed. Even though we have a much smaller exposure today, that's an area that we're that we're excited about. And then the other thing we're doing right now is is uh we have some exposure in the reinsurance. Reinsurance is an area that we looked at for a long time, never invested. The the the the event that really repriced the market was Hurricane Ian when that hit in uh the fall, I think of 2022. Um that was a very devastating hurricane to hit uh western Florida. You caused almost $50 billion of insured losses, significant loss of life. when that event happened, you know, you had a runup of a few hurric a few years before that with bad hurricanes. You you've had you've had really high construction cost inflation. You've had higher interest rates. And so what we found was we got into is insurance companies in Florida had pretty big holes in their balance sheets and they were writing risk and they were being forced to offload that risk from rating agencies or regulators. We followed the market for a long time. We saw this event. We saw how risk was starting to get priced in 2023 and it was significantly different than any time in the past. And so, you know, and the way I characterize it is, you know, if you have a if you if you underwrite a risk that has a one in 10 chance of happening, historically that would get priced that you get paid 15 or 20% to take that risk. So, that number is over 50%. So, the pricing around a unit of risk in Florida wind now is significantly different than it's ever been in the past. And so for us like we spent a lot of time underwriting the risk the market and we've we built a decent size exposure to that and then you know we we actually have we have four verticals that we operate within the reinsurance space but the other thing that has really been significant that's repric risk is the California wildfires from last year like those are very devastating once again significant loss of life but you've had a lot of insurance companies pull out of California and so and these insurance companies need capital to to underwrite risk and and so the way risk is priced in that market is also changed pretty dramatically and so I would say um you know reinsurance you know because of the a lot of the losses that have taken place and because of the insurance companies you know kind of having um lower amounts of capital that's another area that we see great opportunities right now >> what risks in Japan are you worried about >> so I mean the one thing we should at least talk about is you know we there's a lot of risk in our portfolio that we have no control over. So you know there's geo there's significant geopolitical risk in Japan which every market they think about China Taiwan there's a lot of geopolitical risk there's look we could have another global pandemic we could have a recession we could have high inflation and interest rates and so we actually have a pretty robust hedging strategy you know we h we hedge since we're fundamental investors we hedge currency commodity and interest rates at the investment level so for example we hedge the yen we don't have a view on the yen dollar we think about ourselves as being dollar investors so We hedge anything that's not dollar back to the dollar. So um so that's something we do. Same with rates. We don't have a view on rates. So we hedge that out whenever we buy fixed income instruments. And then on top of it, we say we own a basket of financial assets. We have no view on the risk of those events, those types of events happening such as a recession. But often the way the markets are pricing, you can buy protection against those risk in a variety of different forms for very cheap at very cheap levels. And so we build a basket of financial hedges on top of our portfolio. When V is low and then when V is really high, we typically sell them. And so we have a dynamic hedging program that we employ. I worry a lot about China, Taiwan. I worry about like a lot about an earthquake like you can have another I mean Japan has a history of horrible earthquakes obviously which led to a nuclear disaster. I think Japan has you know the demographic changes that we talked about. So um I mean one of the one one of the one of the ways we deal with the demographic changes is you know as I mentioned the government's incentive is really trying to get foreign investors to come in. Most of the companies that we invest in actually are most of their businesses outside of Japan. So so that's one of one of the ways that we deal with that. But um but I do believe these hedges that we buy allow us protect a lot of our downside in these scenarios. So, because it's dynamic, we tend to really load up on the hedges when they're cheap. Um, and then we sell them. So, we ended up selling a big chunk of our hedges, for example, around liberation day when that happened. >> The one hedge or the one risk that you didn't talk about hedging that would be really hard in reinsurance is if the pricing is justified by climate change. You can see the price. It's much harder to see the risk. >> Yeah. So the thing that's fascinating about reinsurance is that the you a unit of risk say there was a vanilla measure for a specific risk there isn't let's say there is the way that is priced across different structures vehicles and different markets is dramatically different so actually one of the hardest parts about reinsurance is just sourcing the risk it's a it's an opaque market it's a lot of bilateral contracts we are to to answer your question about about climate change we are very worried about climate We we we spend a lot of time thinking about how do you price it? What does it mean? We spend a lot of time with scientists um really de trying to develop a view on that. I say where I come out is you know take that one in 10 year Orisa we talked about. So I don't know if it's one in 10 years. I don't know if it's one in 11 nine years, one in eight years, one in seven years, even one in six years. I'm not sure but I know it's not one in five years or one in three years. And that's how it's being priced. often what we see is it's priced so dramatically that it's just it's really that's the opportunity. So one of the things we've heard from talking to climate scientists is that the world's getting warmer without a doubt. Se sea surface water temperatures are rising. A lot of it there's some there's some has to do with the ENSO cycle as well. But the risk is the risk is increasing without a doubt around large hurricanes and we've seen that. So but what what they'll tell you is that it it increases very slowly. So year to year you don't have big changes in the risk of a large hurricane over 10 years 20 years you do which is kind of what we've seen but it's it's it's a slowmoving increase in risk that's what's fascinating to us is because you can have these year-to-year changes in the pricing that is really really dramatic right so I mean the thing that I talked to you about you know that one in 10 year risk might go to over 50% next year it could be 30% or 20%. And so one of the benefits of our model is that we won't invest. We'll move on and we'll be doing something else. If I look at credit for example, there's great times to be invested in credit. There's not great times. When I think about structure products and I think about subprime, the subprime trade back in the mid200s, you you got into that market. Everyone who is most people who were buying risk and who own bonds, they they knew it was insane. They knew it was being propped up by this easy financing that was taking place. And so you talk to them and they but they said we have to invest. Like there's so many of my peers who are doing something very specific um to what their mandate says and they have to invest. And so for us, we don't have to do that. So when credit's not interesting, we're not going to do it. When reinsurance isn't interesting, we're not going to do it. If Japan changes, we're not going to be doing Japan. I think it's one of the biggest benefits to what we do. Like there's so many there's such a financial markets are so large and I've done so many things over the years. Like a lot of it I could never predict. Like if you would have said to me, "Hey, when you started Finepoint, what's the chance that you're going to have, you know, over a majority of your assets in Japan?" I would have said, "You're crazy." And here we are. That's where we are. Or if you would have said, you know, you'll be new stuff in the reinsurance space. I would have said, "What is that?" You know, and so and that's the great part about our model. So, and behind those areas, we have a number of other things that we're working on that we're in the process of, you know, seeing if they meet our bar or not. So um so I do I do feel very fortunate that our investors allow us to invest in different markets to h to operate with an open mandate. I think they look to us to be the person who decides how much equity exposure do you have versus credit. I think they like that about us but I actually think it's one of our biggest assets. >> Are there any other broad opportunity sets that you're excited about? One of the things that we've been spending time on is um an opportunity that's arisen because of the the explosion in the pod shops and also the quant funds. This is not a new dynamic. These you know the quant funds and the and these pod shops have gotten very very big. They employ a lot of leverage which of course allows them to invest even more assets. So we actually have recently found a derivative in an Asian market that um we're buying for 10 to 20% of what we think it's worth. So 80 to 90% discount and it's solely a result of the fact that there's a market in Asia that has such a large demand to be short because of these funds who go long short. So these indexes are there's a massive demand to short them and so we can construct derivatives on the other side of that is it just gives us asymmetric return. We put a little bit of capital to work and we can earn multiples of our capital based on reasonable assumptions and our and our downside is defined because we can only lose um the premium that we put up. But the thing I love about it is that this didn't exist a year ago, two years ago, three years ago, but because of the explosion and the size of these funds, we were able to find it. >> When you do have such disparate opportunity sets, how do you think about portfolio construction and position sizing? When you think about the return characteristics of a Japanese stock versus a credit instrument versus a reinsurance contract, they are really different. And so we have developed this tool that we built internally that really is a variety of quantitative and qualitative factors that helps us think about the return characteristics across these different verticals and how we should think about sizing. Now the factors the quantitative factors that go into it will be things such as what's your base case? What's your 90th percentile? What's the risk? If you get everything wrong, how much money do you lose? What's the timing? Um is is there is there a catalyst around it? Then we have a large number of qualitative things that we think about as well. So do we have a history of success doing this type of investment? Does it have a catalyst? We have a category for the herb conviction score. So what do I how strongly do I feel about this? Um how knowable? So the the inputs, how knowable are the inputs? How knowable is the risk? Does the analyst have a history of success doing this? I think it's important to say that the model really is a starting point. It helps kind of stoke conversations. It helps you know think, you know, kind of based on all your history, you know, what the model is telling you and then we it forms a great basis for a conversation and then we go from there. How do the conversations lead to an ultimate decision either at a specific name or a bigger allocation in the portfolio? >> You know, we are highly collaborative firm. We're all aligned with our partners. Nobody has their own P&Ls here and so and so everyone is really aligned to find the best investments and and so what I have found you know is the best way to run an investment process is you know we'll have analysts who will go out work on investment I tend to work on foot investments pretty closely with people when they bring it to the group we'll typically do that two or three times we'll have large conversations around um around what we're looking at I will be having conversations almost daily if not weekly with the individual analyst and then ultimately I'm we only have one portfolio manager at the firm. So um that's me and so I have to give the go-ahad on an investment. So now where the model comes in that we just talked about is so we will look at the model look at you know how this investment stacks up versus other investments what the model is recommending in terms of sizing how I feel about that recommendation does it you know does it seem does it seem right based upon my experience and then we'll go you know based on that and we'll execute on the investment we have a large majority of our investments that go through this process that could take six months to a year from the time it gets into the portfolio sometimes you have a day to make a decision Right. And so those are the ones actually that are really fun but just require a lot of focus. And so I think you know the one that comes to mind the recent one is Silicon Valley Bank when that was really melting down. You know you had not a lot of information and you're often trying to make decisions based upon this limited amount of information. Markets are incredibly volatile. Same thing happened with credit switch which was of course at the exactly the same time. And so that a lot of it for us is I'm really thinking about what's our downside. How much money could we lose? what's the return profile and what and goes back to the what do we know and what what don't we know and so and so often I have found those types of fast investments tend to be you tend to offer really attractive returns but you have to process a lot of information very quickly and so and so but there is a some percentage of our investments that we have to we do have to react you know in a very short period of time and I do think it's one of the advantages of our size like we can we and move fast. You're looking at the investment committee. So, you know, off we go and we can make decisions. You know, we can trade bonds over the weekend. We can move fast. Um, and that be ends up being a big advantage. >> What are some of the biggest mistakes you've made over the last decade? >> So, I think one of the biggest mistakes was that, you know, value investing has changed over the years. And so, you know, I mentioned the old cigar butts, you know, which turned to buy buying cheap stocks, doing stuff in emerging markets. And I think if I look at finepoint, you know, when we first started the firm, we were doing mostly things that I had had success with historically. But what happened was, you know, if you think about buying cheap stocks and great businesses uh without a catalyst, like that doesn't work anymore. And so, so sometimes you have to, you know, get punched in the gut a few times and have some bad experiences before you change. That ultimately ended up in, you know, us focusing on more catalyzed opportunities um as a result of that. So, I would say the biggest I would say the biggest changes the biggest mistakes that I've made have been not adapting quick enough to what's happening in the financial markets. So, somehow getting stuck on the past and thinking about, well, this always worked before, so it should work today. you know, I I'd been I'd done some successful stuff in the emerging markets. Um, and you know, and then you know, we ended up doing the same kind of investing, but it just the markets had changed and we have to change with it. >> I'd love to ask you about the evolution of the business itself. What was the biggest challenge in getting the business where it is today? So I think the thing I didn't fully recognize when I started finepoint was how difficult it was going to be to start a firm and get it to a point where it was highly functioning. When I look back at Seth and Bow Post and what a phenomenal culture and firm that he built, I think I took it for granted a little bit that it was going to be easy. And so, you know, for us, you know, we really want to have a firm with, you know, with a culture that's very strong, including the highest ethical and moral standards, intellectual honesty, perfect alignment of our own interest with the interest of our LPs. Always asking ourselves when we have difficult questions, what's in the best inter interest of our LPs? We want a culture of transparency. We want a culture of kindness, like culture of respect. We don't I firmly believe that we everyone in this in this firm deserves a high level of respect. Whether you're the man at the end of the day who's cleaning the who's cleaning the office or you're the president of the firm, everyone deserves a very very high level of respect. And so getting all those ingredients right and hiring all the right people and getting everyone in the right seat and developing them and getting them to a point where you felt great coming into work every day was just a lot harder than what I thought it was going to be. So I have to say like to see to have come from Bowpost and to see what Seth had built and to see how difficult that was just gives me a lot more respect for him and for that firm and today when I walk into the firm I can't tell you how so how good I feel how happy I am when you see the fruits of that labor and you know there's an old saying about like when you you appreciate something a lot more when it's difficult right and that it took us a while to get to that place but now I feel like we're at that when you started value investing wasn't so out of favor and you really did start with quite a significant launch. How do you look at it today? I'm very fortunate that I have a phenomenal set of LPs. I have a great team. I have people who are highly energized who like coming to work every day and we're really doing different things. And so, you know, the firm today is size-wise is a little bit bigger than what it was, you know, when we first started, but the types of things that we're doing are dramatically different. And so, because of that, you know, we hire generalists, we hire really good athletes, really smart people who are intellectually curious and can learn almost anything. And we plop them into our model as we go off and embark in looking at a whole variety of asset classes. And so I would say, you know, we have a small number of LPs. We have a small team. We run a concentrated portfolio. We're a researchoriented organization. We're value investors. And so a lot of the fundamentals of who we are really haven't changed. What has changed is just the construct of the portfolio. We started out doing a lot of credit, u maybe some equities. And if I look at what we're doing today, I mean, we're we're concentrated in Japan and reinsurance and a couple other things. I'd say our hedging program really has never changed. That's one that's been probably the one part of our firm, the investment part that has been that has remained constant. You know, I talked to you about how the investing style has changed like you know, the focus on catalyst. Um, we used to hold a lot of cash early on as the team matured, as I matured, as we started doing things in different markets. We've been fully invested for a while now. And so that definitely changed. Um but but also I think the biggest change has just been the markets that we're operating in is uh you know we we found great investments in places that I would have never thought and you know I'm extremely excited about what we're doing. >> As you look out over the next five years what do you hope finepoint becomes? >> So I'm actually really excited for the next five years for a number of reasons. So the first one would be we have we have a great team here. you know, you know, we just passed our our 11th year anniversary. So, you know, we still feel like we're relatively new, but I think over those first 11 years, we have built a A+ team. So, you know, and when you start from scratch, that doesn't happen overnight. It really doesn't. And we had some, you know, and and we've made we've developed folks, we've invested in people. And so, we just have we have a great team. We spend a lot of time together. We work a lot. And we spend a lot of time outside the office together. Like I'm fortunate enough we actually we have lunch together every day. It's like the best half an hour of my day is having lunch with my team. And so the second thing is I'd say the things that we're doing I'm really excited about. We're concentrated portfolio. Most of them are catalyzed. You know going back to what we talked about with reinsurance. You know you're not reinsurance not correlated to the market. We really like that. Japan of course is we have phenomenal LPs who would believe in us who have given us a lot of uh a lot of rope to go out and find great investments. So, I think I'm actually really excited about what we own. I'm excited about the areas that we're operating in. I'm excited about the team. And so, that that that feels really good. I want to ask you a couple closing questions. Before I get to that, there's two things I want to ask you about outside of Finepoint. I used to joke that there was a time when people would be worried that if a hedge fund manager went out and made too much money, they would get distracted and, you know, go buy a sports team or something like that. And it turned out that you owned a piece of a sports team before you even launched Fine Point. So, people didn't have to worry about that with you. um but would love to hear about your interest in baseball. >> So part of it goes back to my paper boy days. So I grew up in the 70s um in uh Dayton close to Dayton, Ohio. So we were very close to the Cincinnati Red. So as a kid I was a huge baseball fan. So you know I still remember waking up and I'd get my 40 newspapers to deliver and I'd go straight to the box scores. Remember you'd open up the newspaper and I'd spend a ton of time just going through every box score, memorizing the statistics for everybody. It just was a lot of fun. So, even from a very young age, I was a big I was a huge huge Cincinnati Reds fan. And so, you know, so back in 2012 through actually through one of my mentors, I was offered the chance to buy a small piece in the Boston Red Sox. And I instantly jumped at it. I remember talking to my wife and I said, "I'm not sure if this is going to be a good investment or not. In fact, it might go to zero, but I just I love I love I want to learn more about the sport. I want to learn about more about the team. I want to get I want to have a deeper connection to what they're doing. And so she was supportive of that. And um you know over time you know they bought Liver they bought a football team in in in uh in the UK called Liverpool. They bought the Pittsburgh Penguins. They made a big investment in the PGA Tour. I tell people it's it's one of the best things I've ever done. It's so much fun. I've enjoyed it with my kids. I've enjoyed it with my wife. Um you know I sit in rooms and I listen to the GM for the Red Sox talk about what he's going to do. I just I pinched myself. I cannot believe I'm in the same room having these conversations. And so um so it's been an absolute joy. >> And the other is um your foundation. You've done a bunch of philanthrop philanthropic work and would love to hear more about what you're doing there. >> My wife and I both grew up in the Midwest. I think we have similar values and we really believe in giving back. We really believe that there's a lot of we've been very fortunate in our lives, but there's a lot of need and there's ways that we can impact people in a very positive way. So, we set up a foundation about 20 years ago. Our foundation is not going to be multigenerational. It's going to be we're going to give all the money away during our lifetime. We really feel like so societal problems are compounding a lot faster than I can compound capital. So, there's a bigger need today than what there is even in 10 years from now. So let's commit ourselves to being thoughtful about it and actually executing it. She So my wife actually runs our foundation. We work together on thinking about the different verticals and how we can make an impact. We focus primarily in global health and also um employment opportunities for inner city youth and then also in the arts. And so we have three verticals that we have really um tried to specialize in and try to focus on. And we're going to we're going to run like crazy to try to make the biggest impact that we can make. between now and the time we can't do it anymore. >> What's been most surprising about your philanthropic work? >> I think the most surprising part is actually it's really hard to give away money. As dumb as that sounds, you know, you you feel such a responsibility. There's so much need and you feel such a responsibility to make an impact and help people and like you just don't want to make a bad decision. And um you know often you can't measure impact like an investment you can measure whether it went well or not. If you give money to a organization that's providing health care to a certain part of the world or a certain neighborhood, it's really hard to measure success. And so there's not great financial metrics in a lot of what we do. So, you know, interesting enough, it goes back to one of the questions that you asked, which is like one of the things that we do is we find great people who have built organizations, great leaders, and we really invest in them. So, I could give you a lot of examples of people that are making tremendous impact in these verticals and a lot of it is you're trusting them to make good decisions, but I've been very surprised about it's just it's tough. It's really tough to do a good job in that area. >> Who's your favorite leader in the world of uh of the charities you given money to? >> So, I would say so hands down my favorite leader um would be someone named Paul Farmer. He ran an organization called Partners in Health. He passed away probably 3 years ago, but there was a great book book written about him called Mountains Beyond Mountains by Tracy KDR. And you know, Paul was somebody who just was just totally committed to helping people and providing the most vulnerable people with the best healthcare that he could. and he was such an inspiring individual and he was so committed and he built this phenomenal organization and he's impacted millions of people in all types of different communities and he was just he's just been an inspiration to me to know people like that is like you just feel you just feel fortunate to have interacted with somebody with that kind of with that mission and those kind of values and somebody who who dedicates their entire life to helping people. So, so luckily we meet a lot of those people. It's one of the coolest parts of uh the work that we do. My wife has a phenomenal team that she works with who help her on this mission. And so, we've been very fortunate to to to have them along along with us really helping, you know, to to make an impact. >> Herb, I want to make sure I get a chance to ask you a couple closing questions. Um, what is your favorite hobby or activity outside of work and family? >> So, I'd say two things. So, first of all, I love to read. You know, I think I think ever since college, as I really got into my academic studies, I've just um I've just really become a voracious reader. I read everything I get my hands on. I read fiction, I read non-fiction, I read investing books, I read sci-fi. I really believe it just it provides it's it's relaxing for me, but it also just opens up different perspectives. You learn so much. Like I went I've gone through different phases recently, like reading about the Civil War or I've read reading about old shipwrecks recently. So, I just love to read and and I think the second one would be I I love to exercise. So, um I've been biking to work for over 20 years. Um and so every day like the best like some of the best parts of my day in the morning, my 30-minute ride in and then the 30 30-minute ride home, you know, nothing just just your thoughts on a bicycle. And so, people have often asked me if that's dangerous, but there's a bike path right down the Charles River that I ride for the most part. And so, but if I'm not biking, I love to run. and I still run half marathons and 10ks and I also like to swim as well. So I feel like I have a lot of energy um and so I love to expand it either on a bicycle or running. >> What brings you the greatest joy? >> So at this point in my career the greatest joy is really is really mentoring people and then watching them grow, develop and make a big impact like you know being part of that and investing in people helping in people. And we I' we've had a number of people here at the firm who have made tremendous impacts for us in and on the business on the investment effort. Um and you spend time with people, you get to know people and you and you invest in them, you give them advice, but ultimately when they actually grow and they make a great investment and they're so happy with themselves and they're so proud and impacts the organization in such a fun way, like that is really the icing on the cake. So, and you know, it goes back to what we were talking about with the team. Like, we have a great team here. I mean, a lot of them are so talented. They probably would would have done great without me. But it's just there's something that's really fun about about seeing that and feeling like you play a small part in it. >> I heard one more. If the next five years are a chapter in your life, what's that chapter about? >> I'm actually really excited about the next five years. We have a phenomenal team here at Finepoint. the combination of great clients, great investment mandate, great portfolio. You know, I'm excited about what could happen on the credit front. So, I think professionally the next five years could be the best five years of my life. The other thing that I'm excited about is, you know, I've hit the stage in my life where my kids are launched. So, I have three kids and my youngest is going to be a a senior in college here, but they're adults. Like, they're they're building their own careers. They're building their own lives. They're they have relationships. And so, and so to help them navigate that, but to also to see where they end up and how they grow and eventually to see their families grow is something that I just think is going to be really cool. So, I'm excited about that. Also, >> Herb, thanks for this rare chance to share your story. [Music]
Herb Wagner – Opportunistic Value at Finepoint Capital (EP.460)
Summary
Transcript
I mean, one of the things that's fascinating about Japan is most experienced investors, so most people that you know have some horror story about investing in Japan, right? And so, and so when I started getting into it, what I realized was people don't like investing in Japan. There's a real institutional bias against it. [Music] Herb, great to see you. Thanks for having me. Why don't you take me all the way back to your upbringing? >> I grew up in a small town in southwest Ohio, Beaver Creek, Ohio. My mother was a teacher. My father was uh drove an oil truck. You know, when I look back at that time, the most formative thing to me was the fact that my parents really believed that we should have jobs. We should be working when we were in school. So, if you ever wanted to buy something, you had to make money for yourself. And so, we were really encouraged to have jobs at a very young age. And so during that time, you know, I was started out as a paper boy when I was 11 years old. I remember, you know, I really the kid that had the paper route was like the only kid in the neighborhood had money. And so when he ended up quitting, I really wanted that job. And so I was 11, you had to be 13. I begged my parents. I begged the paper company to let me do it because it was a route in the morning. I had to wake up at 4:30, had to deliver newspapers every day, 40 newspapers for an hour. But I was able to convince them to do that. And so, you know, as an 11-year-old, you're running your own business. So, you're you're taught responsibility. You know, whether it rains or snows or sleeps or has a blizzard, you have to get up and deliver the newspapers. And then on the weekends, you have to collect for the newspapers. So, you know, you buy the newspapers for 65 cents, you sell them for 90 cents. If people don't pay you, that's out of your pocket. Um, you know, I learned early on that my I had a brother who was 5 years younger than me who was super cute. And if I brought him along, he actually got we got better chips. I'd get candy. I get more I get better tips. And so I used to always haul him along whenever I collected for my newspapers. And so but it teaches you responsibility. It teaches you you have to show up. If people don't get their newspapers at 4:30 in the morning, they're not happy. And so um I did that for 4 years. You know, the thing I also remember at that time was, you know, I used to think to myself like when my friends are sleeping, I was out hustling. Some of the other jobs, so you know, I worked as a bus boy. That was a that was a pretty tough job. But I I will say like, you know, you learn how to deal with all types of people. So if I'm at the golf course and I'm catting and you have an angry CEO who's um who's having a bad round or you're in a restaurant and you have a customer who's really unhappy, like you have to deal with those folks. And I also learned like one of the things I really remember was that I learned that there's a lot of really hardworking people in our economy and that that get up every day and bust their butts and you can't support yourself. And when I was doing that, I remember thinking to myself as someone who's in a small town, like I want a lot more. Like I have to focus on my education. Like that's the only way that I'm going to achieve the goals that I really want to achieve. >> As you went through school, what was the spark that turned you into finance and investing? >> When I was younger, I would say, you know, I had a lot of interest. I played a lot of sports. I worked a lot. But it wasn't really until later in high school and then when I got into college that I really like there was some spark that really just forced me to focus on my grades. I remember my mom was like super proud of me like and that was like a huge spark for me like wow I did something my mom was so happy she's been a huge influence in my life and so that was a that was a big spark and then once you start doing well you know the kind of you get good grades that feels good you get good all types of opportunities and so it really builds on itself >> what was your first job in the industry >> so 1990 I graduated so I went to Miami Ohio as you remember there's a pretty big recession back then so I had a finance degree. I had an accounting degree. Always wanted to do investing. Didn't know a lot about it, but I was always intrigued by it. So, but at the time, Wall Street's firing people, um, blame people off. And so, I didn't have the opportunity to go to Wall Street. My very first job was working at Pete Marwick as an auditor. So, and I remember like from the first time I started working and the one thing that I vividly remember at that first job is that you know like I felt like I've always felt like in life like I was running a race and because of my background because of where I grew up like I was starting this race way behind the starting point. And so for me the only way to get ahead was to work my butt off. That's and so I I've always had this mantra that nobody was going to outwork me. And so at my very first job um I worked as an auditor you know my peers are working 40 50 hours a week I'm working 80 or 90 hours a week and got you know got promoted very very early as part of that what I also remember be befriend befriended somebody and I saw their career they're five years ahead of me and I saw what they were doing and I said I don't want to do that and so I took a risk I left Pete Marwick and actually went to go work for first Chicago which was really my very first investing job. >> What did you do in that first role? I have to say like, you know, I've had a lot of really good fortune in my life, but one of the most fortunate things was I ended up when I was at the bank, a position opened up uh in this group called Distress Debt Trading. And so what this group did, and this is back in the early 90s, and what this group did was when the bank had a loan that went bad, they would just sell it. And so this group used to do the selling of the loans. There was a woman who used to run the group named Gene Lrand who actually was one of my one of my very first mentors who they figured out like we're selling these loans for 20 30 cents on the dollar and the buyers are recovering 70 80 90 cents on the dollar. Like at the time there was a very small universe of people who bought distress loans. You had Samzel, you had some of the Drexal spin-offs, you had a group of Fidelity, but it was a very small there was probably 10 people that we were trading these loans with. But the bank figured out, wow, instead of selling these we actually should be buying these loans. And so they were one of the very kind of pioneers in distress debt investing that figured out they had old workout people that were in the group. So they had the expert the bankruptcy expertise, they had capital from inside the bank and uh and so we were we were instead of often buying these loans from then when they were going bad, we actually were going out learning about what the recoveries are going to be and then we started buying loans from other banks and we actually built a pretty good business during the early 90s doing that. And so, you know, at the time I didn't know that was going to be my a big chunk of my career. I didn't know that was going to be an exploding asset class. I didn't know it was going to be nearly as profitable as what it was. You know, back then we used to, you know, we used to value every company at four times cash flow, every company, and you'd buy them at two times cash flow, right? And you would make gobs and gobs of money for many, many years. One of the things I learned from that job was that um like I I I've always believed in finding mentors and also mentoring people. And so so I had been the benefit of phenomenal mentors throughout my career. I mentioned Gene Lrand, one of my very first mentors. Um but but throughout throughout the years I always would go to people that I respected and I say, "Hey, do you mind if we grab coffee or grab lunch once every couple months? I really respect you and I find you to be very insightful and I'd love to pick your brain on issues. And so and so over time by doing that I just got to meet a lot of great people but also got phenomenal guidance for my career and then over time I ended up mentoring people and so and actually I think being a mentor you actually learn more than being a mentee. So, and so, you know, I so often young people will say to me when I meet young folks, they'll say, "What advice will you give to us?" And I always tell people, I always have three pieces of advice. One of them is like, "Find find a mentor. Just ask somebody." Most people will say yes. If somebody says no to you, they're never going to be a good mentor anyway. So, that's fine. I also tell people like don't worry about how much money you make when you're in your 20s. Just does it doesn't matter. Just just take a job where you can learn, you can grow, you'll get good at it, the money will follow. But I find there's just way too much focus on people trying to maximize their income at a point in their career that it really doesn't matter. And the third thing I say which I was a ma I was a huge beneficiary of was was get into an industry that's growing a business an industry or something that's growing because if you are you like I think about distress debt investing when I was when I was in the in the early 90s but if you're in an industry that's growing like a weed you get so much more responsibility faster. you learn, you become a pioneer with very little very little amount of experience and so and so uh and so if you can do that there's like tons of tons of great things fall from it. So I was an early investor in distressed debt you know I was early when I went to Appaloosa when I was early when I was young as well and that was one of the kind of first larger hedge funds that existed and so and that whole industry ended up exploding. So I've been the beneficiary of like these massive tailwinds behind me. Um and so that's another thing I always encourage folks to do. When you were in that first role, you had a great mentor. You were in a growing space that was doing really well. What led you to leave? >> I loved the job. First, Chicago offered where you could actually get your MBA at night and they would help finance that. And so, and Chicago is a great city where you actually both University of Chicago and Northwestern have night programs. And so, so I was working during the day. I was getting my MBA at night. Actually, funny enough, I met my wife uh during my MBA and we've just passed our 29th year anniversary. So it's fantastic. So you meet great people, but you know I was working a lot and I think I just for me like I I looked at the bank and thought like there was a cap to what I could do there and there was a lot of smart people that were in front of me. The the group was highly successful. Um but I once again I wanted to learn. I wanted to learn okay not only what they were doing I wanted to think about different asset classes think about different parts of the public markets. I wanted to grow to be a great investor. I was there for four years I think and that was I feel like I learned a lot but I just had a thirst to learn more >> and where did that take you? >> So when I graduated with my MBA um moved moved to Boston and so I ended up like my my next so I ended up first went to Putinham and then I was there for a short period of time and then I got a call from Dave Tupper to go go work at Appaloosa. So so another incredibly fortunate thing Ted for me is I've I've worked for two of the best investors of my generation. right? Dave Tapper and Seth Carman. I mean, it's incredibly fortunate. Like, I did research on both of them before I went to go work for them, but I had no idea how talented either one of them was and how successful and how much I learned from them as well. So, so I went to Appaloosa and uh I went to go work for Dave and I mean, one of the things I learned from Dave, like Dave is one of the most Yeah, he's a incredibly talented investor, but he has a he has a nose for opportunity that I've never seen before. like he is like a moth to flames in terms in terms of um trouble risk changing pricing changing. I mean he look can look at any asset class can really understand the fundamentals. You know when I was there with the when we had the Asian financial crisis we great we found great opportunities there. I was there during the Russian default back in 1998. But Dave had this ability to traverse multiple markets think incredibly sharply and simply about macro risk. And when there was massive dislocations amongst fundamentals and prices, he would really jump in, price assets, learn how investors were thinking about them, and be very aggressive at the right time. And when there wasn't great things to do, he would do nothing. And so, you know, when I think about the variety of things that we did there and the variety of areas that he's been successful in over time, it's very, very unusual. So, I felt like like I learned a I felt incredibly fortunate to have worked with Dave and to have learned from him and to watch him invest. >> When you think about the Appaloosa style, the bowpost style almost opposite ends of the spectrum in terms of risk-taking. What did you see say first at Appaloosa and seizing that opportunity when it's there? Appaloosa has more volatility than what Bowost does. So Bowpost has a very risk very robust hedging program just much different culture of the organization. more diversified in in terms of what they owned. And so Dave tended to be a lot more he was a lot more concentrated, a lot more aggressive. Um, and he didn't mind wearing volatility. I think that was something that he was very comfortable with. And you know, at Bowpost, it was also a value strategy, less trading oriented, more just really fundamental fundamental based. There was there was some private assets that they were doing as well. But you're right, they're two incredibly talented people with really different investment philosophies that have both been just incredibly successful. How did you go from one to the other? >> I got a call from somebody who knew Seth who said Seth was looking to add to the team and I remember my wife and I went and had dinner with Seth down when I was in New York and we just really hit it off. Like Seth is a incredibly kind, thoughtful in, you know, crazy smart, phenomenal investor. Like he was willing to mentor me. He was willing to invest in me. I felt like he wanted to he loved investing and he wanted to do it for many, many more years. And there's there was phenomenal people there that I got to met got to meet as well. So you know, sometimes you just meet people things just click. And when I met Seth and spent time with him, I was like, "Wow, I can really learn a lot from this guy and I can I can hopefully become a you learn how to become a good investor from him." And so, and then we were off to the races. >> What was different from what you might have anticipated in that style of investing when you got to Bowpost? >> The first thing that jumped out to me was you'd walk in during the day and it was quiet and everybody had their heads down. Everyone was reading, doing research. And I remember thinking to myself like, "Wow, this is a research organization." Like they're investors, but they're really researching incredibly deeply what they're doing. As you start to understand the BOP's philosophy, like they're really trying to understand situations that they're in better than anyone. They bring in outside resources. They're incredibly smart people. Um, they're very long-term oriented. Like I I always say to people like everyone thinks they're a long-term investor. I think less than 5% of people are truly long-term investors based on my experience. and but they were truly long-term. And so, you know, the model there was really hire great people. Seth would mentor you, give you resources, um help you invest, be be invest alongside of side of you, and then as you did as you did better, you'd get more responsibility and you'd hopefully grow and have a bigger impact. And so, um that was very refreshing to me. It was a culture of intellectual honesty, of trying to get to the right answer. But at fun fundamentally I thought about as as a research researchoriented firm. >> If you take the call it high level investment philosophies of the two firms how did you think about what was resonating most for you >> into different cultures, different environments, different styles. >> Yeah. Yeah. So the thing that's unique about Dave Tupper is I don't know many people who have been as successful as he has in multiple asset classes. Right. I mean he started as a high yield bond trader. He did a lot of distress debt, did a lot of credit, but then he did a lot of emerging markets, did a lot of sovereigns. And now when I listen to Dave talk, I think about him as being a macro investor. I mean, he has incredible insights on, you know, almost any any market, rates, currencies, etc. And he's been successful like in all these different areas. It's very, very unique. Very unique. Seth has also been successful across a lot of different asset classes. I think for me what it was is I looked at myself more like more more like Seth than Dave. Like Dave has a very unique talent but when I was at Appaloosa a lot of it was feeding information to Dave Dave making decisions. I wasn't sure I could ever be like Dave working at Bowpost because the Seth mentors folks I just thought that I could develop and grow a lot more under that structure and you know the research orientation um the long-term orientation it just struck me as something that I could be more successful. It just fit more with my personality. >> How did that play out over your years at BPOS? >> I started as an analyst. I ended up growing, you know, kind of rising through the ranks over the years. And the the model of how Bow Post invest, I think, is actually very similar in a lot of ways to how fineoint invest. And so, you know, I was I was at I was at Appaloosa for a couple years. I was at Bowpost for 14 years. Clearly, the DNA of BPOS is going to rub off me a lot more just because of that. it was a better fit for who I thought I was as an investor and how I like to invest and how I thought I was going to be successful. >> I'd love to ask you about two aspects of the evolution over your career into fine point. Generally speaking, value investing and credit markets where you kind of started. Value investing has had a tough slog over the this last 10 plus years. How do you think about what it means to be a value investor and how you try to go about it? >> When I think about value investing, to me, what I think about is really trying to find misunderstood, mispriced assets in a whole variety of markets. And you know, it used to be back when I was just getting started, it was buying cigar bots like you know, like Warren Buffett and Benjamin Grant used to talk about. So for me really what it's about is was more about identifying areas where there was structural mispricings going up and actually doing fundamental work and valuing what securities or assets are worth in these areas. And then when you can when you can when you can value them and you can buy them at a big discount to that and there's a catalyst to help you realize value you do it. And when there isn't then you don't have to invest. And so when I think about the different areas of what what I've done over the years of what I've worked on, it's pretty broad. It's uh you know like take for example um you know we did a lot of stuff with um you know started out doing credit high yield distress and then we ended up you know moved into structure products did a lot of stuff in South Korea for a number of years Japan you know then we ended up moving into reinsurance and and and uh and you know different credit derivatives. So, it's a pretty broad mix of of products, but I think the common denominator is it's it's out of favor. Um, it's it's hated. There's a something you can have a view that's different than the market. You can understand why it's cheap and you can have a view for what it's worth. And sometimes when you can buy things at a discount to that and and there's a catalyst and you go ahead and do it. When I think about traditional value investing, to me that's um buying cheap stocks, you know. So to cheap on book to you know price to book cheap on if enterprise value ibida what's interesting is when I was years ago we did that we did a lot of that and that used to that would result in good investment returns I'd say probably about 10 or 12 years ago that stopped happening like what I found was we were buying situations where we have a differentiated view that were trading at a big discount to what we thought they were worth based on the metrics we had always used historically but what was happening was our underwriting was correct stock stocks would go down. And so that was happening over and over again. Underwriting, correct? Stocks go down. And so we ended up pivoting a number of years ago like we don't want to have be dependent upon what the market tells us something is worth. And that's why a lot of what we do is catalyzed. So um so that was one of the big I'd say I would say huge change that I made in my investing style probably starting about 10 years ago was not buying things just because they're cheap but really looking for catalyst. And what's fascinating to me as well is, you know, the other thing that I think one of the reasons that that value investors have underperformed I think in the last 10 years is that there's a lot of technological disruption that's taking place and it and it takes place faster than it used to. And so, you know, if I look at when we underwrite a mediocre business and we project out cash flows, if I go back and look at those, which we often do, the decline is always often faster than what you think it's going to be. And so I think that's the curse of the value investor is you know buying mediocre businesses at cheap prices that has not been a good strategy. And so luckily we realized that years ago and we really pivoted away from that as part of our strategy. >> Are there any other significant changes from your thinking about value investing over the years? >> The other big one is is how I value the leader of an organization and mostly a CEO. So I would say the value that I give to leadership is significantly more today than what it ever was in the past. And this actually applies to CEOs, but it also applies to leaders in the government or if I'm trying to do something with a not for profofit. Um how a leader can influence an organization and what type of impact they can have. The way that I weight that in an investment or when I'm thinking about partnering with somebody is significantly more than what it ever was in the past. And I think I think that's just through a lot of bumps and bruises and over the years and a lot of investments. When you invest with great leaders, good things like you're always surprised on the upside. When you invest with, you know, with mediocre leaders, it seems like you're always surprised on the downside. And so that was a big that was a big, you know, that was a big change as well. >> How do you assess the difference between the mediocre leader and the great leader? I think it's through a lot of experience and is spending time with a lot of different types of people. So the way that we have found is best is by um is by finding people who have worked with him who have a you know have a positive or even a negative impression of them and if we get a lot of that data. Yeah. The other thing I often will do is often I've been doing this long enough where um if I'm looking to invest in a company um I might I probably will have a friend who I've known for a while who also knows the individual that we're looking to invest in. And so you know being able to call people who I trust and really ask them how you know kind of how they think about a specific leader um you know that that has been that has been helpful as well. But I also think the third thing too is I think that you know it's it's what people do not what they say. And so it's really you know it's really rolling up your sleeves and looking at their history looking at what they had done looking at their data. So often what I do today I'm probably more reliant on the numbers and like what people are doing the actual facts or that's what's in front of you less so than just sitting down with somebody and having coffee and walking away and saying boy that guy is trustworthy. and the other credit markets, right? You started buying loans at two times cash flow and selling them at four. The world's changed a lot since then. How do you think about the credit markets today and how that's changed? >> So, I have been a credit investor most of my career. I've invested in a lot of different pockets of the credit markets. It's clearly a lot harder today to invest in credit than what it was when I was first inh working at First Chicago. So, we do keep a very close eye on the credit markets. Um, I do think even though as as it we're sitting here in the summer of 2025, our credit exposure is at historic low levels, spreads are tight, there's a lot of capital and you know when I look at where new issue is getting done, how there's no covenants, you know, now in credit you have these LME fights that are going on, these knife fights between creditors that's really eroding value or can erode value or could be an opportunity. Um, so there's a lot of changing dynamics that are happening in credit right now. However, I do believe like credits have credits have been historically pretty volatile and I think it's for reasons because you tend to have money coming in in and out of those markets um especially during times of stress. I am very excited about the credit opportunity set for the next 3 to 5 years. We don't see it right now, but if I think about the dynamics of the credit markets, there's a couple things that jump out to me that kind of that say to me this could be a really great place to invest. So number one, you know, the number of assets in the credit markets that are that are held by vehicles that offer daily liquidity is growing dramatically. So mutual funds, ETF, passive vehicles. So the percentage of those funds, those percentage of the markets assets that are held with those vehicles continues to grow. Number two, the credit markets are not there's no there's not a lot of liquidity in credit markets. And so when when when retail investors or people decide to pull money out because the dealer community in in credit has you know capital's down by 90 plus% over the last 15 years or so. The price movements that you see in credit tend to be ve very severe when there's a shock to the system. It used to be you had weeks or maybe a month to buy something but now you have days because the volatility is so great because of this because of the fact that you have money coming out for selling. dealers don't really have the capital to absorb it and so you have a so you tend to get a lot of volatility in credit. The third thing is I'd say a lot of our competitors have moved to doing private credit. When I look at what's what's going on in that market right now, it strikes me as pretty competitive and not really a great place to find attractive riskadjusted returns. And it's never been through a credit cycle as you know. So we don't really know how private credit is going to perform when when things don't go well which will inevitably happen. we'll have a recession at some point. And so, but we've had a lot of our competitors who on the public side just aren't doing that anymore. And then the last thing I'd say is the markets are enormous. The credit markets continue to get bigger and bigger. At some point, you'll have, you know, you'll have an SBB happen which happened in 2023 when you had a run of the bank, right? And that that thing that thing un kind of came together and or that whole thing collapse in over maybe a couple days or a week, you know? So, you had you had Credit Swiss that had a very quick demise. And so I do think you know there'll be a lot of things that will happen episodically that will lead to opportunities. The telecom space was a mess last year. We found things to do in telecom. But fund business fundamentals will change. We will see volatility. There'll be a horrible hurricane that hits, you know, Puerto Rico or some area that will cause bond prices to change a lot. They'll there'll be a big financial fraud. Like I joke around like we haven't seen a good financial fraud in a long time, right? But I've seen a lot of those in my career and I think we'll see we'll see those going forward as well. And so that will lead to good opportunities. If I go back to my example of 10 people used to do distress investing back in the early 90s, now I don't know the exact number, 500 to a,000 is some huge number. And they're all smart. And by the way, in the early days, we used to be the only ones that would hire bankruptcy lawyers, financial adviserss. So we had this real edge. And that that actually lasted for probably last up until the last 10 years ago. Now everybody hires the best bankruptcy lawyers. Everybody hires the best financial adviserss. So it's it's hard to it's just hard to get your edge. And then if I think about the other stuff that we're doing and it's just it's it's the opposite end of the spectrum. It's differentiated. It's not competitive. And so those are the things that we always gravitate to. So as we dive into that and what you're doing when you bring to bear both the experiences you've had and then these perspectives about how value investing, credit markets and other things have evolved. Um how did you lay out what it is you're trying to do at Finepoint? We're really trying like ultimately we're trying to compound capital over a long period of time. >> Sounds good. >> The way and the way we do that is we have an open mandate. So our our clients have given us a lot of trust that we can look across a lot of different global markets and we can look for areas of structural mispricings. We go in, we underwrite assets and we can buy things cheap with a catalyst. We'll do it and we can't we'll move on. I feel like our job is to find really attractive riskadjusted ter returns. Um, and we have a global we have a global mandate to do that. So, and I'm also a big believer like we don't have to know everything. Like often people will say, "Oh, what do you think about European stock market?" Like I don't really know a lot about it. I don't follow that closely and so I don't really have a view. We have this saying here that, you know, investing you don't get paid for difficulty points, right? It's not like diving where the tougher the dive the more the higher your score. For us, like we that doesn't exist in in in markets. And so for us like one of the things we try to do and I try to do is really have a sense for okay what can we know where are assets priced where is there a lot of stress where are there problems as a big event happened that's maybe caused people to run away from a market and then you know can you really understand is that a is that a risk that you can really understand. It's important to know what you know but it's more important to know what you don't know and I'm a huge believer in that like that's really stuck with us. We look at a lot of odd things. Um, and you know, you have to ask yourself, can you really understand the key risk? So often you think you can, but you can't. And so that's something that we spend a lot of time on. So we look at when we're looking at a different market or an opportunity, that's a key question that we're always asking ourselves. So when you have a global opportunistic mandate and there's a lot of things you don't know, how do you figure out first what you're trying to canvas to then learn enough to know when you want to dive deep? So for us like so it starts with really just generally have an understanding for what's happening in the world and some of the key markets that we that we see potential opportunities. So we're looking for areas that have been volatile, areas that we things that we can understand that we can underwrite. One of one of the areas that we have gravitated away from over the years is take emerging markets for example. So you know the the sovereign risk the macro risk often are the most important risk in any asset you're looking at in a specific emerging market. So we don't think we're good at that. We haven't had a lot of great um we just haven't had a lot of great reps. Um, years ago I would say I was better at that, but I think the uncertainties have grown over the years. And so also take for example, you know, when the Chinese property developers all blew up, when Everran blew up back in 2023, we spent a lot of time trying to figure out, we spent a lot of time trying to figure out could we understand the risk, we ultimately decided we couldn't, you know, because so much of it was dependent upon the government and also so much is dependent upon the accounting and how the banks treat these these different developers and it was very hard to get really good insights on that. So, but more importantly, so there's there's a number of markets that we keep a really close eye on. Every component of the of the credit markets we are laser focused on. If I think about Japan, like Japan was something I had looked at every year for a long time, but because of these changes that started to take place in 2014 and 2015, then we actually started investing. So, you know, I was an investor in South Korea for a very long time and that was that was something that we know well. Um, so a lot there's there's a there's a there's a sec there's a number of markets that we have exhibited a lot of the characteristics that we look for that we have a lot of relationships in that we talk to talk to folks in a pretty regular basis. So we're keeping a close eye on. So when something happens when you have you when you have an event like for example 2016 when oil prices collapsed like there was certain components of the credit markets that got really attractive during that time and so you know we had we knew the companies we've invested in that area so we were able to take advantage of that you know when you have when you have you know if you have another if you have a geopolitical event for example you know like for example when you had you know when Greece essentially defaulted and they default almost defaulted a time like you know you have these big events that happen and you run to them and you say to yourself can we under can we underwrite this risk and is this risk attractively priced so it's funny I what I found over the years from the outside I think it seems overwhelming because there's so much to look at but when you're in the inside and you're like making the sausage and you're sitting around a table with your colleagues and you're going through what's happening in the world and what's how assets are being priced in a in a specific market and is there a catalyst and can we have conviction it actually becomes very clear >> I'd love to dive into the example of Japan You said you looked at it every year, but then about a decade ago, you decided to start investing. What was the reason that you first said, "Okay, now is the time to get involved." As a value investor, you know, I've had numerous friends and folks who've gotten excited about different Japanese opportunities once, twice, three times a year. Before Finepoint, I really never had invested in Japan. So, you know, we roll up our sleeves. We do work on these companies and we generally always found the same problem. Great company, cheap price, poor governance. You know, they were accumulating a lot of money and the money was sitting in the balance sheet. They weren't reinvesting it and so they weren't creating value and also disclosure was difficult, the accounting was difficult and so and so we it fell into the category of you unknowable. So, we ended up not investing. So the big change that happened was, you know, 2012 when Shinszo Abbe got came into his second term as prime minister, he started to recognize that when you have these great companies that are generating fat profits and all this money just sits on the balance sheet of these companies, they don't do anything with it. It's actually destructive for the economy. And so he was really in kind of ahead of his time. So in 2014, he came up with a corporate stewardship code. in 2015, the corporate governance code. So, the corporate stewardship code was a was a was a was a kind of a a roadmap for asset managers to hold companies accountable for better governance. The corporate stewardship code was telling the companies what they should be doing. It wasn't mandated. It was more here's some frameworks what we think you should be doing. So, we saw that and we said, hm, that seems really smart. you know, this is a market that seems ripe for that type of movement or that type of uh action. Let's see what happens. And so, you know, in the subsequent years, we kind of started keeping a close eye who was adopting it, who wasn't. You know, we started to see we started to see dividends increasing. We started to see share buybacks, selling at some cross share holdings, you know, a very at a very minor level. And so, over time, we really rolled up our sleeves and said, "Hm, is this is this time different? Like, are these changes really going to stick?" And do ke do do investors care about them? So I mean one of the things that's fascinating about Japan is most experienced investors, so most people that you know have some horror story about investing in Japan, right? And so and so when I started getting into it, what I realized was people don't like investing in Japan. There's a real institutional bias against it. you know, you had a big asset bubble that exploded in 1990 and this has caused a lot of pain and there's a lot of people just have a bias against it. So, second thing I learned was, you know, people would say to me, oh, there's so much sovereign debt in Japan. Yeah. And there is there's, you know, debt to GDP for Japan is 250%. That but but the central bank ends up owning a large chunk of that debt. So, the actual net numbers a lot smaller. Japanese interest rates are lower. But what's fascinating about Japan, I think what people miss is that when you're when you're looking at the leverage in an economy, you have to look at every level. So the Japan sovereign leverage is high, but net of the central bank is actually manageable. The banking system has is well capitalized now. Corporates in Japan and then households, I mean, they all had they're all net cash. And so households sit on massive cash balances. They generally don't like to invest in the stock market. So if you look at the economy collectively, it's actually it's actually not that levered. You compare that to the US for example, the US has, you know, our sovereign debt now is getting close to 100%. Our banking system is well capitalized to similar there, but our companies have a lot more debt and individuals are very levered and so and so for some reason there's a bias against Japan because of this one number which we just didn't think was told told the whole picture. So when you go to dive deep on Japanese companies sitting in Boston, you have cultural differences, you have language differences. How do you get up the curve to the level of depth that you would want to take significant position? >> So you are exactly right. The barriers to invest in Japan are enormous. So the cultural barriers are huge, the language barriers are huge, the accounting is different, the time, you know, the time zone is different. I mean, I can't tell you how many times I wake up at midnight or 1:00 for a telephone call, you know? So, it's it's tough. It's difficult. And so, so when we first, we probably spent over a year underwriting Japanese companies, spending time over there, understanding all of this, you know, before we made our first investment. So, you know, if you fast forward to today, we have five people on our Japan team that speak Japanese. And so we understand the accounting, we understand the cultural differences between the two. You know, I I was I was always amazed when I first started going to Japan. We'd we'd have investment meetings and we'd have my we'd have the Japan team and we'd go in and I'd come out and I'd say, "Wow, what the guy just told me was A." And the Japanese guys were like, "No, no, no, no, no. He wasn't saying A. He was saying B, C, and D." And I was like, "What?" And so what you realize is they communicate in a totally different way. You know, relationships are very important in Japan. The government is very important to Japan. You need to be on the right side of the government on every investment that you make. That's very important. The government, I tell people, is the biggest activist investor in Japan. Like the other the other barrier I always hear about people in Japan investing in Japan is they'll tell me, "Oh, the demographics are a disaster." Right? I mean, the birth rate is low. Everyone knows that. The death rate is high. There's very little immigration. The population is shrinking. All true. What the government's figured out is because of these demographic challenges, they need to attract foreign capital. And so they have been doing a lot to try to make it easier. And so what's interesting about Japan is you have you have this tailwind of governance reform that's actually being led by the government and being adopted by a lot of a lot of folks. And so to answer your question, when we go over there and we actually, you know, how do you how do you underwrite a Japanese company? We're not trying to invest in the market. We're trying to find people and most CEOs boards who really understand the benefits of better governance. So we're not activists. We don't push people to do anything. For us, if we if we buy stock and we meet with them and then we don't like what we hear, then we just sell the stock and move on. So So what we found in the early days is is there was there was companies that were starting to adopt these changes. And when they started to adopt these better governance changes, the the opportunity is massive. So, think about a companies for for 50, 60, 70 years that always paid low dividends, always held on to their earnings, had massive cross shareholdings, owns all their real estate, has no leverage at all. And so, if you start to get them to say, "Okay, let's think about your cost of capital." The way to reduce your cost of capital is to take a little bit of leverage out at 1% or less, recapitalize your company, maybe buy back some stock, or maybe reinvest or buy or reinvest in a growth business. The heart of the opportunity for us is there's very few people like us over there. So Japan is still most global long only managers most asset manager underweight Japan still I believe I've never seen I'd never been able to kind of exactly quantify this number. I think almost or over 90% of the market is passively managed. So there's very very few fundamental bottoms up investors in Japan. So when we go in, we roll up our sleeves and we engage with these companies, other people aren't doing that. And we can really have a differentiated view with every investment that we make. We spend a lot of time with these with these companies. Um, you know, it could be years before we actually make our first investment. And so, you know, we like to we're not going to invest just by what they say to us. We need to see them start to do things. And so, and what's fascinating about Japan, you know, they because these opportunities are so big, you could see them do things for years and stock prices don't react at all where we can actually gain conviction on what they're doing. And as we started making these investments, what we figured out was um the companies that were making these changes, the stock market was was recognizing the increase in value, but generally not until the seventh or eighth or ninth inning. like once they started seeing the benefits of a lower cost of capital, higher margins, selling off, you know, bad businesses, reinvesting those businesses into growth businesses. Once you started seeing that and the numbers, that's when the Japanese market started to get excited. So we kind of saw that and really started engaging and figuring out who is where where are these ch like who's serious about these changes and so and luckily we've been doing it like we've been doing it for nine years now because we need to see a lot of tangible change we need to spend time with people to really understand do they believe this like if you look at 20 years ago there was a big push for activism in Japan that largely failed today the market is ready for it so if you accelerate if you look at it today these reforms are accelerating. The government continues to push hard. Companies that make these changes, stock prices go up and um and everybody wins. And so we we feel like we're part of this revolution that's taking place. We're helping steward companies. We're helping helping them realize a lot of these positive benefits. And so that's the core of our of our investment efforts. within that broad group of companies making significant governance changes, have you found any either sort of substrategies or sectors where that has been more prevalent than others? >> The answer is yes. And so what's what's interesting about Japan is typically when you see a company in an industry start to make significant changes and in their stock prices go up and they start to reap the benefits because now they have excess assets to to buy grow other businesses. What happens is you other start to see other people follow in that same industry. IT services for example where there's been a few companies like Hitachi was really one of the leading companies in this area. So they started making a lot of these changes and really started to you know sell off listed subsidiaries sell off excess assets reinvest in growth businesses. I mean the stock price has been has done tremendous. And then other companies like to follow as well. And there's some industries that are kind of I'd say that are very slow to change and they really haven't they haven't haven't adopted the benefits of better governance. I would say you know I don't exactly know the how what percent of companies are actually taking positive action but it's a well less than a majority. I think eventually most companies will do it but this is still I mean we're still in the infancy. I'd say the last few years have you've seen a lot more of an impact than the than the five years before that. So I think that's really positive. But there are there definitely are industries um who you know because there's a leader because there's someone who champions the cause that a lot of other people see the benefits and then they follow. So you mentioned that you don't participate as an activist investor but the time may be ripe for activism. How have you looked at the behavior of activists and companies in your investment remit? >> We would rather find great companies and great management teams. I'd say today what we have found is you know 20 years ago I don't think people understood what the activists were doing and why and what the benefits were. Now I think the market really understands okay you know there's an activist who's going after who had who bought stock in a company that has massive cross shareholdings huge cash balances owns all their real estate very bad margins and so investors say wow that's an opportunity and so if there's an activist that gets involved what you see today is there's a lot more support they say oh you know everyone is doing this this is really good for the market it's good for society and so there's like there's there's buy in amongst the asset management community there's buyin amongst the government and so when you start to see activism take positions and advocate for change kind of everyone piles in behind them so now there are sometime there are instances where you still have companies that fight them really hard but but just the kind of the culture around activism has just it's really changed um and it's and I think it's because people see the benefits of it I think that um and so I think that's for the biggest reason >> and you started investing in Japan a decade ago and have continued since you built up your team. How have you grown your exposure in thinking about the riskreward to where you are today? >> So you when we first started doing it back in 2017, it was a new market for us. There was a lot of changes that were taking place. We weren't certain. Our relationships were newer. So it was it was a smaller part of what we did. Um, as we as we did it more and started having more success and the underwriting the things that we were underwriting were actually happening, stock prices were trading to what we thought they should, events were happening that we thought were likely to happen. So, as we had more and more success and we also, you know, we we built out a great team who manages the effort. So as we got more more confidence in in the team and what they were doing and how they were engaging, you know, the the the exposure continued to grow and then if you fast forward today, it's a very large exposure for us. People ask me all the time like how much longer will it last? And I really feel like I mean Japan I think is the third largest equity market in the world. Minority of companies have actually gone through these changes. I think you I don't know if you're in the third inning, the fourth inning, the fifth inning. The number of people investing in Japan really hasn't changed that much. So what's fascinating to me too is you know we've had success others had success you know asset management is competitive like you think when you see firms that have outsized returns you'd have a flood of folks running to to run to a place but it goes back to the barriers to entry the barriers entry are high I remember the early days when we invest in Japan you know you have to you know you you when you go to see a Japanese company you have to go through a process you have to go through the junior IR person then the senior IR person then like the controller then the head head of accounting and then like the head of accounts payable and like maybe you'll get to, you know, the treasur and the holy grail of the CFO is like maybe six years, you know, five years later you get to the CFO and the CEO would never meet with anybody. We don't always go straight to the top, but often we do. But we have a reputation that we've developed over there where people trust us as stewards. They trust us as as investors. They they they know that we're doing things for the right reasons. We're long-term oriented. And so that, you know, so that's really a big difference today than what it used to be. So, but I'm I'm very excited about our effort there. I'm really excited about the changes that are taking place as well. >> What are some of the other opportunities that excite you? >> So, I'd say there's two other things. I continue to be really excited about the credit opportunity set for the next three to five years for the reasons that we discussed. Even though we have a much smaller exposure today, that's an area that we're that we're excited about. And then the other thing we're doing right now is is uh we have some exposure in the reinsurance. Reinsurance is an area that we looked at for a long time, never invested. The the the the event that really repriced the market was Hurricane Ian when that hit in uh the fall, I think of 2022. Um that was a very devastating hurricane to hit uh western Florida. You caused almost $50 billion of insured losses, significant loss of life. when that event happened, you know, you had a runup of a few hurric a few years before that with bad hurricanes. You you've had you've had really high construction cost inflation. You've had higher interest rates. And so what we found was we got into is insurance companies in Florida had pretty big holes in their balance sheets and they were writing risk and they were being forced to offload that risk from rating agencies or regulators. We followed the market for a long time. We saw this event. We saw how risk was starting to get priced in 2023 and it was significantly different than any time in the past. And so, you know, and the way I characterize it is, you know, if you have a if you if you underwrite a risk that has a one in 10 chance of happening, historically that would get priced that you get paid 15 or 20% to take that risk. So, that number is over 50%. So, the pricing around a unit of risk in Florida wind now is significantly different than it's ever been in the past. And so for us like we spent a lot of time underwriting the risk the market and we've we built a decent size exposure to that and then you know we we actually have we have four verticals that we operate within the reinsurance space but the other thing that has really been significant that's repric risk is the California wildfires from last year like those are very devastating once again significant loss of life but you've had a lot of insurance companies pull out of California and so and these insurance companies need capital to to underwrite risk and and so the way risk is priced in that market is also changed pretty dramatically and so I would say um you know reinsurance you know because of the a lot of the losses that have taken place and because of the insurance companies you know kind of having um lower amounts of capital that's another area that we see great opportunities right now >> what risks in Japan are you worried about >> so I mean the one thing we should at least talk about is you know we there's a lot of risk in our portfolio that we have no control over. So you know there's geo there's significant geopolitical risk in Japan which every market they think about China Taiwan there's a lot of geopolitical risk there's look we could have another global pandemic we could have a recession we could have high inflation and interest rates and so we actually have a pretty robust hedging strategy you know we h we hedge since we're fundamental investors we hedge currency commodity and interest rates at the investment level so for example we hedge the yen we don't have a view on the yen dollar we think about ourselves as being dollar investors so We hedge anything that's not dollar back to the dollar. So um so that's something we do. Same with rates. We don't have a view on rates. So we hedge that out whenever we buy fixed income instruments. And then on top of it, we say we own a basket of financial assets. We have no view on the risk of those events, those types of events happening such as a recession. But often the way the markets are pricing, you can buy protection against those risk in a variety of different forms for very cheap at very cheap levels. And so we build a basket of financial hedges on top of our portfolio. When V is low and then when V is really high, we typically sell them. And so we have a dynamic hedging program that we employ. I worry a lot about China, Taiwan. I worry about like a lot about an earthquake like you can have another I mean Japan has a history of horrible earthquakes obviously which led to a nuclear disaster. I think Japan has you know the demographic changes that we talked about. So um I mean one of the one one of the one of the ways we deal with the demographic changes is you know as I mentioned the government's incentive is really trying to get foreign investors to come in. Most of the companies that we invest in actually are most of their businesses outside of Japan. So so that's one of one of the ways that we deal with that. But um but I do believe these hedges that we buy allow us protect a lot of our downside in these scenarios. So, because it's dynamic, we tend to really load up on the hedges when they're cheap. Um, and then we sell them. So, we ended up selling a big chunk of our hedges, for example, around liberation day when that happened. >> The one hedge or the one risk that you didn't talk about hedging that would be really hard in reinsurance is if the pricing is justified by climate change. You can see the price. It's much harder to see the risk. >> Yeah. So the thing that's fascinating about reinsurance is that the you a unit of risk say there was a vanilla measure for a specific risk there isn't let's say there is the way that is priced across different structures vehicles and different markets is dramatically different so actually one of the hardest parts about reinsurance is just sourcing the risk it's a it's an opaque market it's a lot of bilateral contracts we are to to answer your question about about climate change we are very worried about climate We we we spend a lot of time thinking about how do you price it? What does it mean? We spend a lot of time with scientists um really de trying to develop a view on that. I say where I come out is you know take that one in 10 year Orisa we talked about. So I don't know if it's one in 10 years. I don't know if it's one in 11 nine years, one in eight years, one in seven years, even one in six years. I'm not sure but I know it's not one in five years or one in three years. And that's how it's being priced. often what we see is it's priced so dramatically that it's just it's really that's the opportunity. So one of the things we've heard from talking to climate scientists is that the world's getting warmer without a doubt. Se sea surface water temperatures are rising. A lot of it there's some there's some has to do with the ENSO cycle as well. But the risk is the risk is increasing without a doubt around large hurricanes and we've seen that. So but what what they'll tell you is that it it increases very slowly. So year to year you don't have big changes in the risk of a large hurricane over 10 years 20 years you do which is kind of what we've seen but it's it's it's a slowmoving increase in risk that's what's fascinating to us is because you can have these year-to-year changes in the pricing that is really really dramatic right so I mean the thing that I talked to you about you know that one in 10 year risk might go to over 50% next year it could be 30% or 20%. And so one of the benefits of our model is that we won't invest. We'll move on and we'll be doing something else. If I look at credit for example, there's great times to be invested in credit. There's not great times. When I think about structure products and I think about subprime, the subprime trade back in the mid200s, you you got into that market. Everyone who is most people who were buying risk and who own bonds, they they knew it was insane. They knew it was being propped up by this easy financing that was taking place. And so you talk to them and they but they said we have to invest. Like there's so many of my peers who are doing something very specific um to what their mandate says and they have to invest. And so for us, we don't have to do that. So when credit's not interesting, we're not going to do it. When reinsurance isn't interesting, we're not going to do it. If Japan changes, we're not going to be doing Japan. I think it's one of the biggest benefits to what we do. Like there's so many there's such a financial markets are so large and I've done so many things over the years. Like a lot of it I could never predict. Like if you would have said to me, "Hey, when you started Finepoint, what's the chance that you're going to have, you know, over a majority of your assets in Japan?" I would have said, "You're crazy." And here we are. That's where we are. Or if you would have said, you know, you'll be new stuff in the reinsurance space. I would have said, "What is that?" You know, and so and that's the great part about our model. So, and behind those areas, we have a number of other things that we're working on that we're in the process of, you know, seeing if they meet our bar or not. So um so I do I do feel very fortunate that our investors allow us to invest in different markets to h to operate with an open mandate. I think they look to us to be the person who decides how much equity exposure do you have versus credit. I think they like that about us but I actually think it's one of our biggest assets. >> Are there any other broad opportunity sets that you're excited about? One of the things that we've been spending time on is um an opportunity that's arisen because of the the explosion in the pod shops and also the quant funds. This is not a new dynamic. These you know the quant funds and the and these pod shops have gotten very very big. They employ a lot of leverage which of course allows them to invest even more assets. So we actually have recently found a derivative in an Asian market that um we're buying for 10 to 20% of what we think it's worth. So 80 to 90% discount and it's solely a result of the fact that there's a market in Asia that has such a large demand to be short because of these funds who go long short. So these indexes are there's a massive demand to short them and so we can construct derivatives on the other side of that is it just gives us asymmetric return. We put a little bit of capital to work and we can earn multiples of our capital based on reasonable assumptions and our and our downside is defined because we can only lose um the premium that we put up. But the thing I love about it is that this didn't exist a year ago, two years ago, three years ago, but because of the explosion and the size of these funds, we were able to find it. >> When you do have such disparate opportunity sets, how do you think about portfolio construction and position sizing? When you think about the return characteristics of a Japanese stock versus a credit instrument versus a reinsurance contract, they are really different. And so we have developed this tool that we built internally that really is a variety of quantitative and qualitative factors that helps us think about the return characteristics across these different verticals and how we should think about sizing. Now the factors the quantitative factors that go into it will be things such as what's your base case? What's your 90th percentile? What's the risk? If you get everything wrong, how much money do you lose? What's the timing? Um is is there is there a catalyst around it? Then we have a large number of qualitative things that we think about as well. So do we have a history of success doing this type of investment? Does it have a catalyst? We have a category for the herb conviction score. So what do I how strongly do I feel about this? Um how knowable? So the the inputs, how knowable are the inputs? How knowable is the risk? Does the analyst have a history of success doing this? I think it's important to say that the model really is a starting point. It helps kind of stoke conversations. It helps you know think, you know, kind of based on all your history, you know, what the model is telling you and then we it forms a great basis for a conversation and then we go from there. How do the conversations lead to an ultimate decision either at a specific name or a bigger allocation in the portfolio? >> You know, we are highly collaborative firm. We're all aligned with our partners. Nobody has their own P&Ls here and so and so everyone is really aligned to find the best investments and and so what I have found you know is the best way to run an investment process is you know we'll have analysts who will go out work on investment I tend to work on foot investments pretty closely with people when they bring it to the group we'll typically do that two or three times we'll have large conversations around um around what we're looking at I will be having conversations almost daily if not weekly with the individual analyst and then ultimately I'm we only have one portfolio manager at the firm. So um that's me and so I have to give the go-ahad on an investment. So now where the model comes in that we just talked about is so we will look at the model look at you know how this investment stacks up versus other investments what the model is recommending in terms of sizing how I feel about that recommendation does it you know does it seem does it seem right based upon my experience and then we'll go you know based on that and we'll execute on the investment we have a large majority of our investments that go through this process that could take six months to a year from the time it gets into the portfolio sometimes you have a day to make a decision Right. And so those are the ones actually that are really fun but just require a lot of focus. And so I think you know the one that comes to mind the recent one is Silicon Valley Bank when that was really melting down. You know you had not a lot of information and you're often trying to make decisions based upon this limited amount of information. Markets are incredibly volatile. Same thing happened with credit switch which was of course at the exactly the same time. And so that a lot of it for us is I'm really thinking about what's our downside. How much money could we lose? what's the return profile and what and goes back to the what do we know and what what don't we know and so and so often I have found those types of fast investments tend to be you tend to offer really attractive returns but you have to process a lot of information very quickly and so and so but there is a some percentage of our investments that we have to we do have to react you know in a very short period of time and I do think it's one of the advantages of our size like we can we and move fast. You're looking at the investment committee. So, you know, off we go and we can make decisions. You know, we can trade bonds over the weekend. We can move fast. Um, and that be ends up being a big advantage. >> What are some of the biggest mistakes you've made over the last decade? >> So, I think one of the biggest mistakes was that, you know, value investing has changed over the years. And so, you know, I mentioned the old cigar butts, you know, which turned to buy buying cheap stocks, doing stuff in emerging markets. And I think if I look at finepoint, you know, when we first started the firm, we were doing mostly things that I had had success with historically. But what happened was, you know, if you think about buying cheap stocks and great businesses uh without a catalyst, like that doesn't work anymore. And so, so sometimes you have to, you know, get punched in the gut a few times and have some bad experiences before you change. That ultimately ended up in, you know, us focusing on more catalyzed opportunities um as a result of that. So, I would say the biggest I would say the biggest changes the biggest mistakes that I've made have been not adapting quick enough to what's happening in the financial markets. So, somehow getting stuck on the past and thinking about, well, this always worked before, so it should work today. you know, I I'd been I'd done some successful stuff in the emerging markets. Um, and you know, and then you know, we ended up doing the same kind of investing, but it just the markets had changed and we have to change with it. >> I'd love to ask you about the evolution of the business itself. What was the biggest challenge in getting the business where it is today? So I think the thing I didn't fully recognize when I started finepoint was how difficult it was going to be to start a firm and get it to a point where it was highly functioning. When I look back at Seth and Bow Post and what a phenomenal culture and firm that he built, I think I took it for granted a little bit that it was going to be easy. And so, you know, for us, you know, we really want to have a firm with, you know, with a culture that's very strong, including the highest ethical and moral standards, intellectual honesty, perfect alignment of our own interest with the interest of our LPs. Always asking ourselves when we have difficult questions, what's in the best inter interest of our LPs? We want a culture of transparency. We want a culture of kindness, like culture of respect. We don't I firmly believe that we everyone in this in this firm deserves a high level of respect. Whether you're the man at the end of the day who's cleaning the who's cleaning the office or you're the president of the firm, everyone deserves a very very high level of respect. And so getting all those ingredients right and hiring all the right people and getting everyone in the right seat and developing them and getting them to a point where you felt great coming into work every day was just a lot harder than what I thought it was going to be. So I have to say like to see to have come from Bowpost and to see what Seth had built and to see how difficult that was just gives me a lot more respect for him and for that firm and today when I walk into the firm I can't tell you how so how good I feel how happy I am when you see the fruits of that labor and you know there's an old saying about like when you you appreciate something a lot more when it's difficult right and that it took us a while to get to that place but now I feel like we're at that when you started value investing wasn't so out of favor and you really did start with quite a significant launch. How do you look at it today? I'm very fortunate that I have a phenomenal set of LPs. I have a great team. I have people who are highly energized who like coming to work every day and we're really doing different things. And so, you know, the firm today is size-wise is a little bit bigger than what it was, you know, when we first started, but the types of things that we're doing are dramatically different. And so, because of that, you know, we hire generalists, we hire really good athletes, really smart people who are intellectually curious and can learn almost anything. And we plop them into our model as we go off and embark in looking at a whole variety of asset classes. And so I would say, you know, we have a small number of LPs. We have a small team. We run a concentrated portfolio. We're a researchoriented organization. We're value investors. And so a lot of the fundamentals of who we are really haven't changed. What has changed is just the construct of the portfolio. We started out doing a lot of credit, u maybe some equities. And if I look at what we're doing today, I mean, we're we're concentrated in Japan and reinsurance and a couple other things. I'd say our hedging program really has never changed. That's one that's been probably the one part of our firm, the investment part that has been that has remained constant. You know, I talked to you about how the investing style has changed like you know, the focus on catalyst. Um, we used to hold a lot of cash early on as the team matured, as I matured, as we started doing things in different markets. We've been fully invested for a while now. And so that definitely changed. Um but but also I think the biggest change has just been the markets that we're operating in is uh you know we we found great investments in places that I would have never thought and you know I'm extremely excited about what we're doing. >> As you look out over the next five years what do you hope finepoint becomes? >> So I'm actually really excited for the next five years for a number of reasons. So the first one would be we have we have a great team here. you know, you know, we just passed our our 11th year anniversary. So, you know, we still feel like we're relatively new, but I think over those first 11 years, we have built a A+ team. So, you know, and when you start from scratch, that doesn't happen overnight. It really doesn't. And we had some, you know, and and we've made we've developed folks, we've invested in people. And so, we just have we have a great team. We spend a lot of time together. We work a lot. And we spend a lot of time outside the office together. Like I'm fortunate enough we actually we have lunch together every day. It's like the best half an hour of my day is having lunch with my team. And so the second thing is I'd say the things that we're doing I'm really excited about. We're concentrated portfolio. Most of them are catalyzed. You know going back to what we talked about with reinsurance. You know you're not reinsurance not correlated to the market. We really like that. Japan of course is we have phenomenal LPs who would believe in us who have given us a lot of uh a lot of rope to go out and find great investments. So, I think I'm actually really excited about what we own. I'm excited about the areas that we're operating in. I'm excited about the team. And so, that that that feels really good. I want to ask you a couple closing questions. Before I get to that, there's two things I want to ask you about outside of Finepoint. I used to joke that there was a time when people would be worried that if a hedge fund manager went out and made too much money, they would get distracted and, you know, go buy a sports team or something like that. And it turned out that you owned a piece of a sports team before you even launched Fine Point. So, people didn't have to worry about that with you. um but would love to hear about your interest in baseball. >> So part of it goes back to my paper boy days. So I grew up in the 70s um in uh Dayton close to Dayton, Ohio. So we were very close to the Cincinnati Red. So as a kid I was a huge baseball fan. So you know I still remember waking up and I'd get my 40 newspapers to deliver and I'd go straight to the box scores. Remember you'd open up the newspaper and I'd spend a ton of time just going through every box score, memorizing the statistics for everybody. It just was a lot of fun. So, even from a very young age, I was a big I was a huge huge Cincinnati Reds fan. And so, you know, so back in 2012 through actually through one of my mentors, I was offered the chance to buy a small piece in the Boston Red Sox. And I instantly jumped at it. I remember talking to my wife and I said, "I'm not sure if this is going to be a good investment or not. In fact, it might go to zero, but I just I love I love I want to learn more about the sport. I want to learn about more about the team. I want to get I want to have a deeper connection to what they're doing. And so she was supportive of that. And um you know over time you know they bought Liver they bought a football team in in in uh in the UK called Liverpool. They bought the Pittsburgh Penguins. They made a big investment in the PGA Tour. I tell people it's it's one of the best things I've ever done. It's so much fun. I've enjoyed it with my kids. I've enjoyed it with my wife. Um you know I sit in rooms and I listen to the GM for the Red Sox talk about what he's going to do. I just I pinched myself. I cannot believe I'm in the same room having these conversations. And so um so it's been an absolute joy. >> And the other is um your foundation. You've done a bunch of philanthrop philanthropic work and would love to hear more about what you're doing there. >> My wife and I both grew up in the Midwest. I think we have similar values and we really believe in giving back. We really believe that there's a lot of we've been very fortunate in our lives, but there's a lot of need and there's ways that we can impact people in a very positive way. So, we set up a foundation about 20 years ago. Our foundation is not going to be multigenerational. It's going to be we're going to give all the money away during our lifetime. We really feel like so societal problems are compounding a lot faster than I can compound capital. So, there's a bigger need today than what there is even in 10 years from now. So let's commit ourselves to being thoughtful about it and actually executing it. She So my wife actually runs our foundation. We work together on thinking about the different verticals and how we can make an impact. We focus primarily in global health and also um employment opportunities for inner city youth and then also in the arts. And so we have three verticals that we have really um tried to specialize in and try to focus on. And we're going to we're going to run like crazy to try to make the biggest impact that we can make. between now and the time we can't do it anymore. >> What's been most surprising about your philanthropic work? >> I think the most surprising part is actually it's really hard to give away money. As dumb as that sounds, you know, you you feel such a responsibility. There's so much need and you feel such a responsibility to make an impact and help people and like you just don't want to make a bad decision. And um you know often you can't measure impact like an investment you can measure whether it went well or not. If you give money to a organization that's providing health care to a certain part of the world or a certain neighborhood, it's really hard to measure success. And so there's not great financial metrics in a lot of what we do. So, you know, interesting enough, it goes back to one of the questions that you asked, which is like one of the things that we do is we find great people who have built organizations, great leaders, and we really invest in them. So, I could give you a lot of examples of people that are making tremendous impact in these verticals and a lot of it is you're trusting them to make good decisions, but I've been very surprised about it's just it's tough. It's really tough to do a good job in that area. >> Who's your favorite leader in the world of uh of the charities you given money to? >> So, I would say so hands down my favorite leader um would be someone named Paul Farmer. He ran an organization called Partners in Health. He passed away probably 3 years ago, but there was a great book book written about him called Mountains Beyond Mountains by Tracy KDR. And you know, Paul was somebody who just was just totally committed to helping people and providing the most vulnerable people with the best healthcare that he could. and he was such an inspiring individual and he was so committed and he built this phenomenal organization and he's impacted millions of people in all types of different communities and he was just he's just been an inspiration to me to know people like that is like you just feel you just feel fortunate to have interacted with somebody with that kind of with that mission and those kind of values and somebody who who dedicates their entire life to helping people. So, so luckily we meet a lot of those people. It's one of the coolest parts of uh the work that we do. My wife has a phenomenal team that she works with who help her on this mission. And so, we've been very fortunate to to to have them along along with us really helping, you know, to to make an impact. >> Herb, I want to make sure I get a chance to ask you a couple closing questions. Um, what is your favorite hobby or activity outside of work and family? >> So, I'd say two things. So, first of all, I love to read. You know, I think I think ever since college, as I really got into my academic studies, I've just um I've just really become a voracious reader. I read everything I get my hands on. I read fiction, I read non-fiction, I read investing books, I read sci-fi. I really believe it just it provides it's it's relaxing for me, but it also just opens up different perspectives. You learn so much. Like I went I've gone through different phases recently, like reading about the Civil War or I've read reading about old shipwrecks recently. So, I just love to read and and I think the second one would be I I love to exercise. So, um I've been biking to work for over 20 years. Um and so every day like the best like some of the best parts of my day in the morning, my 30-minute ride in and then the 30 30-minute ride home, you know, nothing just just your thoughts on a bicycle. And so, people have often asked me if that's dangerous, but there's a bike path right down the Charles River that I ride for the most part. And so, but if I'm not biking, I love to run. and I still run half marathons and 10ks and I also like to swim as well. So I feel like I have a lot of energy um and so I love to expand it either on a bicycle or running. >> What brings you the greatest joy? >> So at this point in my career the greatest joy is really is really mentoring people and then watching them grow, develop and make a big impact like you know being part of that and investing in people helping in people. And we I' we've had a number of people here at the firm who have made tremendous impacts for us in and on the business on the investment effort. Um and you spend time with people, you get to know people and you and you invest in them, you give them advice, but ultimately when they actually grow and they make a great investment and they're so happy with themselves and they're so proud and impacts the organization in such a fun way, like that is really the icing on the cake. So, and you know, it goes back to what we were talking about with the team. Like, we have a great team here. I mean, a lot of them are so talented. They probably would would have done great without me. But it's just there's something that's really fun about about seeing that and feeling like you play a small part in it. >> I heard one more. If the next five years are a chapter in your life, what's that chapter about? >> I'm actually really excited about the next five years. We have a phenomenal team here at Finepoint. the combination of great clients, great investment mandate, great portfolio. You know, I'm excited about what could happen on the credit front. So, I think professionally the next five years could be the best five years of my life. The other thing that I'm excited about is, you know, I've hit the stage in my life where my kids are launched. So, I have three kids and my youngest is going to be a a senior in college here, but they're adults. Like, they're they're building their own careers. They're building their own lives. They're they have relationships. And so, and so to help them navigate that, but to also to see where they end up and how they grow and eventually to see their families grow is something that I just think is going to be really cool. So, I'm excited about that. Also, >> Herb, thanks for this rare chance to share your story. [Music]