MATT MILSOM: Morning John, and welcome back
to Real Vision. JOHN HEMPTON: Thank you. MATT MILSOM: I want to start off with everyone’s
favorite topic. JOHN HEMPTON: And we know that is Tesla. MATT MILSOM: Absolutely. JOHN HEMPTON: It’s like the most controversial
stock in the world. And it’s my– we have a tiny position short. And there’s a big picture and a small picture. But the big picture is simply, this is the
best example, at the moment, of turds mixed with raisins on the stock market. That’s not my line. It’s an old Charlie Munger line. But if you mix turds with raisins, they’re
still turds. MATT MILSOM: [LAUGHS] All right. JOHN HEMPTON: And Elon is– the good things
you can say about Elon are at least partly true. The car is wonderful. MATT MILSOM: Incredible. JOHN HEMPTON: Nobody who’s driven it doesn’t
get it, it’s like. And moreover, electric cars are, in lots of
ways, going to be superior to internal combustion engines in ways you haven’t thought through
clearly. In the end game, an electric car should have
the maintenance profile of an egg beater, an electric egg beater. In other words, it just won’t need much maintenance. And I remember my old Toyota Corolla ’73 model
used to have had the oil changed every 5,000 kilometers. In my current car, it’s every 20,000 kilometers. And the maintenance man used to be a serious
mechanic. And now he just plugs a computer in. And it tells him what part he needs to bolt
off and bolt on again. And it doesn’t need maintenance anyway. It’s just flawless. But we’re going to get that step of improvement
again. So that’s the good bit. The bad bit is that Tesla’s manufacturing
quality is kind of awful, right? And you hear case after case after case of
it. And that reflects in both warranty costs. It reflects in a few unhappy customers. And it also reflects in just his manufacturing
costs being way, way, way too high. And there’s a sort of big picture question
here, which is, can he get his manufacturing costs and manufacturing quality to match Toyota
or Volkswagen before Toyota and Volkswagen manage to match his technology in cars? And so far, I hate to say it, both Toyota
and Tesla have surprised me to the downside. It’s sort of annoying that Toyota or Volkswagen
haven’t achieved it yet. The new Jaguar I-Pace is, in every sense,
as good as a Tesla. And the manufacturing quality is probably
a bit better twice. MATT MILSOM: The price at least, though. JOHN HEMPTON: Yes, but Volkswagen and Toyota,
when they do it, it will not be twice the price. That manufacturing quality will be astonishing
when they get there. And then there’s the series of it doesn’t
add up. And you could look at this 100 different ways. And it’s not going to add up, the idea that
solar roof tiles were going to be as cheap as asphalt. MATT MILSOM: [LAUGHS] JOHN HEMPTON: Sort of
bizarre. The weird manufacturing ups and downs, the
rush to deliver on the final day, and then there’s the wacky conspiracy theories like,
where all the VIN numbers? And the conspiracy theory about the VIN numbers–
and it’s completely untestable– is that the VIN numbers don’t match because Tesla is doing
a Heilig-Meyers. And I’ve heard this conspiracy theory from
the Twitter-ati 50 times. So I’m going to spell it out and tell you
there ain’t no evidence. Right, no evidence that’s convincing. Heilig-Meyers was the first AAA securitization
to default. It defaulted in the early 90s. And it’s hard to work out what went wrong. But I’m going to give you the bare thesis. Heilig-Meyers was a junk furniture shop selling
subprime furniture on installments. And the AAA strip was 55% overcollateralized. So in order to lose money on the AAA’s 55%
of the loans plus the spread, it needed to default. And as it turned out, about 65% or 70% of
the loans defaulted. And you end up with the AAA stripping impaired. And after the event, it was discovered that
only 25% of the loans corresponded to real addresses. Now, it’s actually hard to work out what happened
because the documents are terrible. And it went through bankruptcy court and litigation. And no one ever went to prison. So but the absolute hyper bear case was that
they were selling furniture to fictional people. And then they would fill out a fictional loan. And they put the furniture back on the store. And they’re sell it to another fictional person. And they keep repeating. And they put these fictional loans into a
securitization, sell the securitization to the market. Some of the cash that they got was used to
pay on the interest on the past fictional loans. And some went into their South American bank
accounts. And at the end of the day, they left. And there’s a giant shortfall. And all the loans of fictional people. So they’re, by definition, uncollectable. Now, the wackiest conspiracy theory I’ve heard–
MATT MILSOM: On the VINs. JOHN HEMPTON: –is that the VIN numbers don’t
work because of that. So at one end, you have these Elon being a
complete innovator. MATT MILSOM: But the cars have to end up somewhere
physically. JOHN HEMPTON: Who knows? In the Heilig-Meyers case, no furniture ever
moved. You just had furniture that didn’t match reality. MATT MILSOM: Well, I saw these tweets where
the guy had tracked the car once he gave it back to them and they’d bought it back at
the wrong price sort of thing. He tracked the car on his app as to where
it was in the battery level, what the level of the battery was. And it just parked. They hadn’t tried to do anything with it. Battery died, it had been there for six months
without being tried to be resolved. JOHN HEMPTON: So the question is, well, has
it been resolved to a securitization vehicle? MATT MILSOM: Right. JOHN HEMPTON: You can’t see. This is some bad asset backed paper out there. Now, I only point this out because I actually
think Elon’s an amazing guy. MATT MILSOM: Right. JOHN HEMPTON: The car really is amazing. And there are bits that don’t make sense to
me like solar roof tiles. There are bits in the short seller conspiracy
that are off-the-planet wacky, the idea that Elon is pulling a giant Heilig-Meyers is a
pretty large stretch. And there are bits out there, this guy really
has changed the world, right? I mean, don’t kid yourself. Launching a rocket is hard. And there are a lot of hedge fund managers
who are nowhere near that competent. I’m fascinated because it’s really good stuff
mixed with really bad stuff. And really good stuff mixed with really bad
stuff is fun to watch. We are short. We’re short about that much. If the stock goes to 400, I won’t be very
unhappy. I still wish I’d never heard of the company. I’ve been short for a few years. And I’ve paid a few years of borrowed cost. I’ve had a small number of options expire
worthless. If the stock goes to zero, I’ll have a drink
at Elon’s expense. And I’ll actually be sad for the world. MATT MILSOM: But this is a philosophical thing
between your shorts and your longs. Are you doing on a forward basis or a value
basis? In general, it’s forward. JOHN HEMPTON: Generally, we’re short forwards. And Elon has about 300 red flags. This is a company full of red flags. You’ve shown me 15 red flags of certain types,
and I’m shorted. And every now and again, I get stuffed by
that. MATT MILSOM: Not just accounting things, but–
JOHN HEMPTON: Not just accounting things. I’ll give you an example. There was a company called Amarin last year,
which was a biotech testing high purity fish oil for cardiovascular disease. It had associated with it a single person
who I am not going to name who wasn’t a director but it had done business with the company. And to my knowledge, that single person had
never been associated with a company that didn’t go to zero. And so we were shorted. We weren’t shorted because we had any view
on the science. We weren’t shorted because we know a lot about
cardiovascular disease. We don’t. We were shorted because it had a red flag. And the red flag is fairly good. And over the history of Bronte, we’ve run
1,000 shorts. And we’ve managed to run shorts through the
bull market profitably. And almost all of them are chosen just because
there’s a red flag. And the red flag indicates that there might
be fraud. MATT MILSOM: One? JOHN HEMPTON: Well, in this case, it was one
red flag. But it was a really good one. And it was a really good one in the sense
that there were 15 previous examples that this person had been associated with that
had gone to zero. And if you’re involved in fraud A, fraud B,
fraud C, fraud D, fraud E, and you’re now involved in stock F. MATT MILSOM: And never
been to prison. JOHN HEMPTON: And you’ve never been to prison,
I’m going to guess that stock F is a fraud. MATT MILSOM: Reasonable. JOHN HEMPTON: And in this case, I was wrong. MATT MILSOM: Ah. JOHN HEMPTON: And I wasn’t wrong a little
bit. I was wrong spectacularly. So it turns out that, in the double blind
study, high purity fish oil looks better than statins at reducing heart attack to the point
that I think pretty well every adult over 50 is going to be on high purity fish oil
at some stage in their lives. And they have a registered version that’s
going to get FDA approval as a drug. And the market is potentially huge because
it’s taken as a prophylactic effect. The stock was trading at about $3 the day
before the results came out. And it’s trading at $19 now. We covered it at $14 on the way up. I’m just reading the results and thinking,
oh Jesus. Now, there’s a fund run by a friend of mine
who didn’t tell me he was long to the eyeballs. But he was long to the eyeballs. And he was long on the science. Now, as I said, we’ve run 1,000 shorts over
the history of Bronte. We currently have 200 on the books. We’ve managed to run 1,000 shorts and not
lose money. In fact, we’ve made a double digit percentage
in aggregate over 10 years of the bull market. Now, I don’t get out of bed for 2% per year. But it does allow us to be 120% or 130% percent
long and have a beta at that 0.4. It’s a lot of effort in the short book. But it’s chosen on red flags. And some red flags, they’re so good that just
one red flag will be enough. We thought that with Amarin. Sometimes you need five red flags. Tesla has like 25. There’s no way that I’m not going to be short
Tesla. But I’m short this much, just like I was with
Amarin. And if I’m wrong, which I doubt in this case,
but if I’m wrong, it’s not going to worry me. Now, the other thing about Tesla is it doesn’t
look like the penalty for being wrong on the common is very large. Tesla has a market cap north of $50 billion
most of the time. The market cap looks roughly like a completely
unimpaired GM. That’s a half a Toyota. And even if they get there, they’re going
to be copied. There’s a large amount of capital needed to
ramp up their production. It doesn’t just– even if the current production
were entirely salable, which may not be, it’s not big enough to justify the current market
cap. In order to get there, they need sort of $15
or $20 billion of capital for expansion plus, of course, the shortfalls in the current book
which are not– But I don’t know how large they are. They’re probably 3 to 15. If they’re 3, Elon will raise it. And if they’re 15, we’ll be pushing up daisies
at some point or other. MATT MILSOM: But they can’t cover you think
because of the margin or not with the market alone– JOHN HEMPTON: Well, we don’t know–
look, the business was profitable in the fourth quarter, probably and legitimately. And I do say probably and legitimately because
I don’t trust the accounts. There is absolutely no way it’s profitable
in the first quarter with the deliveries that they’ve done. Absolutely no way. Elon’s admitted that it’s going to draw a
lot of cash. It’s drawn down cash almost every quarter
of its existence. The first quarter is evidence that the turnaround
is not today or tomorrow. when Between now and the turnaround, if the
turnaround ever happens, it’s going to need a lot of cash. If that lot of cash is $5 billion, the bit
in the stock is sufficient to pay for it. If that cash is $15 billion, then he probably
needs to raise so much stock that the stock price will go down low enough to trigger his
own margin loans. And that’s a sort of catastrophe version for
the longs. I don’t want to express really strong opinions
on this because I actually like the guy. I think the world could do with a few more
Elon Musk’s. Elon Musk could do with a bit of adult supervision. MATT MILSOM: Thoughts on the SEC? A bit toothless. JOHN HEMPTON: It’s hard. Look at– Elon Musk clearly and flagrantly
breached his court orders. MATT MILSOM: He’s doing it now. JOHN HEMPTON: Yes, clearly and flagrantly
breached his court orders. It wasn’t even close. The penalty for a normal person for doing
that is actually to be locked up. If you do that, Tesla collapses instantly. There is no judge. And there is no SEC that wants to be responsible
with their paw prints over the collapse. The SEC will investigate after the event. They’re archeologists, not investigators. MATT MILSOM: I guess they’re coming to the
end of a two week period now, aren’t they? They have to try and sort it out between them. Yeah JOHN HEMPTON: They’re, going to sort
it. There’ll be some kind of rap over the knuckles
again. If you think that a judge is going to do something
that causes the imminent collapse of Tesla, you haven’t watched the way that judges behave. Now, if Tesla were to collapse, he might wind
up in prison as well for just breaching court orders. Contempt of court is imprisonable in most
parts of the world. But as long as Tesla’s alive and dependent
on him, no judge is going to call it. And I don’t know anything about this judge. I suspect he’s like every other judge– competent
and methodical and cautious. And the end cautious is the reason nothing’s
ever going to happen there. I can’t understand why you would own it. But can understand why you would own it is
a common phenomenon in this market. Things are expensive. MATT MILSOM: Why? T Rowe Price are beginning to agree with you. It seems like it’s been taken up by retail
from– JOHN HEMPTON: Did T Rowe Price own a lot? I really don’t– MATT MILSOM: They just announced
they just slashed it. They cut the whole thing massively earlier
today. JOHN HEMPTON: I’m sorry. I don’t follow other people’s 13x. MATT MILSOM: But I think Robinhood has taken
it unfortunately. JOHN HEMPTON: Yeah, that Robinhood data. We’re short Sellers and the classic thing
we short is promoted fraud. We short whatever the hot stuff that can be
sold to retailers. And the Robinhood data is somewhat useful. When you see vast accumulations of crap in
Robinhood accounts, it’s probably somewhere near the end of the line. And Robinhood have an open API that releases
vast amounts of the data about their holdings. It’s bizarre. To give Interactive Brokers a plug, there’s
no question that paying a little bit of fees at Interactive Brokers produces better trading
results than Robinhood. The Robinhood people sign a contract that
allow them to buy several percentage points higher than the current market. The Robinhood thing is, let’s give our data
to hedge funds who know we’re retail. And hence, they can guarantee– the usual
problem with a market maker is you’re trying to cross the spread, ding, ding, ding, ding,
ding, ding, ding. And the problem is that somebody off wants
to buy $1,000 worth of stock. And you’ll automatically sell them. Then they want to buy 5,000 more. And that’s within your lumber. You want to sell them. And then you want to buy 20,000 more, and
you might sell them. But now you’re 30,000 short the stock. And then you discover that they want to buy
10 million. And the market maker loses money on those
transactions. But they make money on the small ones. That person buys 5,000. And that’s it there. And somebody else sells 5,000. As long as they’re crossing spreads on small
amounts, they will. The Robinhood is all small amounts. So the guys that are doing market making know
that they’re never going to get hit by that $20 million order. And they never going to be on the wrong side
of it. It’s just an invitation. Hey, you know, I’m a small investor, right? It’s like, I’ve never seen– the idea that
this is actually something that retail investors do astonishes me. MATT MILSOM: You use Interactive for execution? Or no, your investor– JOHN HEMPTON: I used
to. And I’m an investor. And I miss them. We had– MATT MILSOM: Yeah. JOHN HEMPTON: No, I missed them for our fund. We actually had $100 million sitting in interactive
as a prime at one stage. And we were shorting stuff that was sold to
retail. And so they had a really, really good borrow
book. If you wanted to borrow $200,000 worth of
some particularly crappy AMES stock, Interactive Brokers usually had it. MATT MILSOM: At GC? JOHN HEMPTON: Sometimes at GC, sometimes not. I’m going to give you a pluses and minuses. It turns out that their execution is extremely
cheap. And we’ve measured it extremely good. But their borrows outside the US are somewhat
expensive. And inside the US, we did some price comparisons
on borrows with Fidelity of all people. MATT MILSOM: As a broker? JOHN HEMPTON: As broker. Fidelity has a prime brokerage service, which
has a really, really good borrow book in the US. And Fidelity’s prime brokerage was cheaper
on a lot of the borrowers than Interactive by about half a percentage point, which, if
you’re shorting $200 or $300 million worth of stock, it starts adding up. MATT MILSOM: They didn’t have Harvey Norman,
Interactive. JOHN HEMPTON: Yeah, they’re not very good
in Australia. And the reason is they don’t have a lot of
retail clients in Australia. And if they don’t have retail clients in Australia,
they don’t have retail borrow in Australia. MATT MILSOM: What I liked about them is when
they alert you to, if you have a negative yield in currency, they say, you know you’re
going to have to pay us, and all that. JOHN HEMPTON: Yes. [LAUGHTER] MATT MILSOM: Which is very generous
of them. Shall we move on to longs? JOHN HEMPTON: No, but it’s also fair. IB has a simple rule about here is LIBOR. If you have a deposit with us, we pay you
25 BIPS less than LIBOR. If you have assets, it’s 25 bits more. It doesn’t seem to matter which currency. MATT MILSOM: But the warning was good of them. JOHN HEMPTON: Yeah, but it’s also fair. I mean, the idea of negative yielding– the
people who want to short bonds and they have these negative rate bonds they want to short
it, but the problem is that they short the bonds. And then they get a whole lot of cash. And they’ve got to deposit the cash. And that yields even a higher negative rate
than the bonds so that they pay to short a negative yield bond. MATT MILSOM: Ouch, so longs and the world
of longs. JOHN HEMPTON: This is hard. This is hard. We buy really high quality companies. And we’re not interested in buying second
tier companies because they’re cheap. And the problem we have is that the really
high quality companies are kind of expensive. And they didn’t go down last year. And there’s a simple explanation for our returns
in the first quarter, which is everything that went down hard last year bounced hard
in the first quarter. And everything that didn’t go down hard last
year didn’t bounce. And it’s actually, the worst stock we had
in the fourth quarter, was our best stock in the first quarter. But we have long after, long after, long after,
long it just barely went down. So if you look at our fourth quarter, we were
up. And we were running. In December, we were 130 long and 70 short. And we wound up up 3% in US dollars. And our longs only produced minus 4 in December. MATT MILSOM: There should some second convexity
in your shorts, I guess, all right? If that makes sense. JOHN HEMPTON: There’s all sorts of mathematical
problems in our short. [LAUGHS] Our shorts, if you’re running 200
shorts at any time, your management is a set of mathematical problems. It’s not a set of, do I understand this business? I’ve just hired a mathematician. I actually don’t know what he’s going to produce
for me. But then the idea, I guess, is to hire people
who are smarter than you. And John Graham clearly is smarter than me
on this stuff. So that should work. But yes, there are convexity problems. There are all sorts of other problems. MATT MILSOM: So how concentrated is the long
book? JOHN HEMPTON: Our ideal long book is sort
of 15 longs of 7% to 8% each, adding up to sort of 120-ish. MATT MILSOM: So 15 by 200. JOHN HEMPTON: Right, but if you look at our
top 10 longs, that adds up to about 75% exposure. We have a lot of little longs. And the classic little long is an extremely
superior business that we mettled with that was superior, thought was a little expensive,
bought 50 pips as a rating position and come back three years later and the 50 pips is
up threefold, and we just wish we bought more. There’s a lot of those in the portfolio. I’ll give you an example. This is a long that’s not in the portfolio. It’s possibly the best company I know anywhere
in the world. And I expressed it earlier. And you had never heard of it. It’s called Christian Hansen or just CHR Hansen. And they make bacteria. Now, it’s a really good thing if your business
does a small but critical part of some big process because then you can charge money
based on that big process. And you want it to have a high switching costs. So if they change to a different supplier,
it’s going to stuff them up in some way. Then you’ve got this really good pricing pattern
they can’t get away from you. Christian Hansen’s core business is it makes
bacteria for yogurt. And in the old days, the way you used to make
yogurt was you’d have a vat of milk the size of this room. And you’d have an old tub of yogurt. And you just hit old tub of yogurt in. And the bacteria in the old tub would spread
through the new tub. And hopefully, the yogurt tasted the same. And you’d get drift. You’d get the odd phage. A phage is a virus that eats bacteria. They’re actually the most common pieces of
animal on the planet. You would get the stray bacteria so that the
flavor would change. And every now and again, you’d get a bad batch. And a bad batch was expensive because you’d
throw out a pile of milk the size of this room, says, 50 or 100 tons of milk. These days the way you do it is you get some
freeze dried bacteria. And the freeze dried bacteria comes from the
factory. And every topic freeze dried bacteria is exactly
the same as the last tub. And you just inject the freeze dried bacteria
into this. And then your yogurt tastes the same every
time. And you never get a bad batch. Now, the branding and the flavor are interrelated. If you change brand of bacteria, you’re going
to change flavor. And then people who are used to your brand
will think maybe this is off. And then they won’t buy it again. So the switching cost is very high. Then what they’ve done is they’ve selectively
bred the bacteria for years and years and years and years. And they’ve selectively bred it so that the
yogurt tastes creamier or the yogurt tastes sweeter. And you now see a plethora of low fat yogurts
on your shelf in the supermarket, and they don’t taste like crap. And the reason they don’t taste like crap
is that Christian Hansen has bred bacteria to make the yolk that taste creamier than
it really is. Now, this is a product that can really charge
for. It’s a small part of a very big process. It’s got a very high switching costs. It just means money. They also do bacteria for cheese. And every cheese you’ve ever seen has basically
the same ingredients– milk parts and bacteria, and all the flavor differences of bacteria. Some French runny cheese and English Stilton
have basically the same ingredients plus a different bacteria. And so there’s a wide range of bacteria that
they can use for flavors. And not only do they do 70% of the world’s
yogurt, they’re probably approaching half the world’s cheese and all the industrial
cheese of the world. It’s an astonishing business. And when I first found it, it was six times
sales. The revenue was six times sales. And it was still growing. But it was sort of over half the world’s yogurt. So I didn’t think it was going to double. It’s now 10 times sales. No, correction, it’s 11 and 1/2 times sales. And sales have gone up a fair bit. Now, there’s an old Scott McNealy quote after
the last bull market or the tech bull market. And he’s quibbling with his audience who are
happily buying Sun at $64, which was just over 10 times revenue. And his simple question is, what were you
thinking? In order to get a 10% return, I have to give
you 100% of revenue as dividend. And I pay any tax, which is rather difficult. Holders you can’t pay any tax on your dividends,
which is kind of illegal. And I’ve got to somehow or other pay my 38,000
employees. And I’ve got to do enough R&D to keep my position. What were you thinking? You didn’t need any footnotes. It was just dumb. And we’re seeing these really high quality
companies– And Christian Hanson may be the best company I’ve ever seen in my life. But they’re trading at multiples that looked
like Sun at the height of the bubble. And you’ll come back in five years, And the
question is, what were you thinking? And yeah, some of them will work. When Google IPO’d, it was 12 times sales. And sales went up. And then they went up. And then they went up some more. And I used to think that Google was getting
ridiculous when the revenue was approximately– and I still own it. So I had to bite my tongue the whole way. MATT MILSOM: What were you thinking? JOHN HEMPTON: But I used to think it was getting
ridiculous when it was approaching the revenue of US Network TV. And Us Network TV supports a lot of people. It supports cameramen. It supports all sorts of things of Hollywood
types who have egos and fast cars like Teslas and whatever it is. But lots of egos and lots of people. And all of that is supported out of the revenue
line if US Network TV. And Google didn’t look like it had cost structures
that looked like US Network TV. They looked a lot better than the US Network
TV. And it was approaching the revenue of US Network
TV, and I thought, it’s probably nearly done. The revenue’s doubled and doubled again since
then. And I’ve underestimated how far revenues can
go the whole way. It’s now trading at five and a bit tons revenue. And given its cost structures look relatively
light, that doesn’t look awful. MATT MILSOM: How do you compare this to the
Lyfts and the Ubers because that’s IP. That’s technologically advanced businesses,
new things. This is catching a cab and getting food delivered. JOHN HEMPTON: Yeah, Uber puzzles me. I can’t work out– I haven’t read– MATT MILSOM:
The S1? JOHN HEMPTON: –the S1 that came out this
week. MATT MILSOM: Total addressable market, is
it? JOHN HEMPTON: Yeah, no, no, you told me about
this. I was asked to guess what the total addressable
market was. And I said, well, land transports, like 6%
of global GDP. So I thought 5% of global trade GDP, so I
thought about $6 trillion. And the answer comes back– but you’ve forgotten
food. MATT MILSOM: And you’ve forgotten all these
other things. JOHN HEMPTON: Freight, and they think the
total addressable market is $14 trillion. And global GDP is, what? $83 or $84 trillion at the moment, something
in that range. MATT MILSOM: $88 now. JOHN HEMPTON: $88, I’m sorry. MATT MILSOM: And they’re thinking $12 trillion. JOHN HEMPTON: Yeah, right, yeah, the addressable
market is from a different planet. But what Uber does is it organizes a taxi
for me. And it takes 20% of the revenue. And all it does is a software tracking it. The only really service is I have a piece
of software that connects this person to another person. This should be the most astonishingly profitable
business in the history of Christendom. MATT MILSOM: And yet. JOHN HEMPTON: It hasn’t made a penny. If I understand– MATT MILSOM: $10 billion
in the last three years. JOHN HEMPTON: I understand. But it’s one of those– you ask me, would
I short it because it loses money? And the answer no because the underlying business
structure just looks like it should be the most profitable business in the history of
Christendom. MATT MILSOM: And not a fraud. JOHN HEMPTON: And not a fraud. And someday or other, it just doesn’t have
very many of my red flags attached to it. And some day or other, if it really can be
that profitable, well, maybe a management team will want to make it that profitable. At the right price, I’d go along the thing. I don’t think this is the right price. MATT MILSOM: It hasn’t been set yet, I suppose. JOHN HEMPTON: Yes, but I don’t think this
is going to be the right price. I don’t actually have a problem with it. I tend to prefer my businesses have management
that demonstrates that they know how to make a profit. MATT MILSOM: With a bit of a track record. JOHN HEMPTON: Yeah, if they risk it a little
bit. But when Google came public, it didn’t have
profit. And the revenue went further than you could
possibly imagine. And the management team still look a bit fragile. Part of the issue with Google is we don’t
know how much money they spend on their bits. It just looks rather black box-ish. But it’s pretty hard to fault them. If I’m saying they look a little bit fragile,
I’m kidding myself. They’ve done way better job than you would
rationally have expected. MATT MILSOM: At least they those– hundreds
of them don’t leave every year, I suppose, like at Tesla. JOHN HEMPTON: No, they’re not obviously running
out of cash whereas, you know– and I guess Uber at one stage is probably going to have
to become rational because you can run out of– it’s like the problem with socialism. You’ll eventually run out of other people’s
money to spend. MATT MILSOM: In this case, the Vision Fund
or SaudiJOHN HEMPTON: Whatever it is. It’s a great welfare program. MATT MILSOM: So you see this as a bear market
rally in the first quarter. JOHN HEMPTON: Yes, but I’m talking my book. MATT MILSOM: I’ve got longs and shorts. JOHN HEMPTON: Yeah, but we’re sideways. And I would be much, much happier with them. We tend to go up very slightly when the market
goes down. But the real thing is that, when the market
goes down, our shorts are deliver us a big whack of cash. And that big whack of cash is there to buy
Christian Hansen at 3 times revenue rather than 10 times revenue. MATT MILSOM: Right, but it’s not the beater
of the shorts. It’s when they go under is when you really
make the killing, right? JOHN HEMPTON: Yeah, well, if I can find longs
at will and shorts with some difficulty, then I’m going– which is not the case at the moment. But if I could, I would run with it. If we come to a world where the Christian
Hansen’s, the really fine companies, are trading at three times revenue and the crappy companies
are blowing up, then I will take the profits that we made from the shorts in cash and go
buy large whacks of longs. And I probably won’t replace the short because,
if I can find lots of longs at willingness, the market’s going to go up. MATT MILSOM: So you got stopped out a couple
of times last year? JOHN HEMPTON: If you have 200 shorts, you
get stopped out on some. We tend not to get stopped out very much. And the reason we tend not to get stopped
out is that our starting position is like 20 pips. And we’re actually tolerant of the short tripling. And the ability to just be tolerant to the
short tripling means that you don’t get stopped out very much. MATT MILSOM: But you don’t add. JOHN HEMPTON: We don’t add. You can’t add at that point. Now, if a stock triples and our red flag looks
like it was a mistake, we will cover it so fast it’s silly. Amerin is my classic example. But there’s an Amerin most years in our fund. Some of them really annoy me. There was a tiny little one. If any of your readers have ever heard of
it, I will be stunned, could Aurore Med Pharmaceuticals. And Aurore Med Pharmaceuticals were testing
an oral version of insulin. And the oral version of insulin was going
to be wrapped in some kind of gelatin. And the first tests were phase two A’s, which
were safety tests. And of course, they passed because it was
a protein wrapped in another protein. It’s going to be safe. The basic problem is that oral insulin ain’t
going to work because your gut is going to digest the stuff. The reason why it’s given intravenously is
that it’s got an atomic mass over 130,000. And if your atomic mass is over 130,000 for
a protein, your gut has to break it down to get it inside. You might be able to breathe it in. And that’s a very marginal thing. There’s a longstanding drug promote called
MannKind, which was about inhaled insulin. But this one was completely bozo. It turns out that the chief scientist was
undisclosed the mother-in-law of the CEO. MATT MILSOM: Was that the red flag? JOHN HEMPTON: There were 20 red flags. MATT MILSOM: Oh, OK. There you go. JOHN HEMPTON: And we put it on, our usual
30 pip position. And then they hiked the successful phase 2A
test. And the stock went up six-fold. MATT MILSOM: D’oh. JOHN HEMPTON: We didn’t cover it all. But we covered some. We finally took it off down about 70% from
where we originally put it on. MATT MILSOM: Happy end? JOHN HEMPTON: 34 years– no, not a happy ending
because there’s no way that we can recover the stuff that we sold. We short sold at $6 and covered at $30. And when it was up fivefold, we had to cover
some. We were stopped out. But we were stopped, if you understand. MATT MILSOM: Right, right. JOHN HEMPTON: And we kept some position on. But if a stock goes from $10 to $0 over your
$65, I’m losing money on it. And if you have 200 shorts and you’re right
about most of them, it turns out that most the place you lose money is ones that go from
$10 to $0 over your $60. It happens all the time. And if you short 3% positions– and a lot
of people do– one of those is going to give you a very bad year. MATT MILSOM: So this, in terms of hiding in
plain sight, are you publicizing– well, you can’t really publicize your situation. JOHN HEMPTON: No, we don’t publicize our shorts
at all. MATT MILSOM: But in terms of the story. You’re involved in the Twitter sphere on Tesla
for example. JOHN HEMPTON: Yeah, look. Yeah, I’m involved in the Twitter sphere on
Tesla because Tesla’s the most fun you can have on Wall Street. MATT MILSOM: It’s amusing. Yeah, OK, gotcha. JOHN HEMPTON: Basically, it’s the most fun
you can have sitting in a chair. [LAUGHTER] MATT MILSOM: Steady. JOHN HEMPTON: Steady, steady, it’s a really
good fun. MATT MILSOM: Yeah, right. There’s just so much volume in terms of people’s
views. It’s so emotive, clearly. JOHN HEMPTON: Yeah, look. The whole idea that Tesla is something between,
it’s going to save the world from greenhouse gases and completely change the way we live–
MATT MILSOM: It might blow up the world with those batteries. JOHN HEMPTON: –to Heilig-Meyers– MATT MILSOM:
Yeah, really. JOHN HEMPTON: –with nothing in between. MATT MILSOM: That’s right, it’s pretty bright
black and white. JOHN HEMPTON: Both of those views are way
too extreme to be real is my view of them. MATT MILSOM: Somewhere in between. JOHN HEMPTON: Somewhere in between. MATT MILSOM: We’ll find out more on April
24th. JOHN HEMPTON: We find out more every day. MATT MILSOM: That’s true. JOHN HEMPTON: It’s like, if you wanted to
follow Tesla– MATT MILSOM: And do nothing else. JOHN HEMPTON: –you could do nothing else
with your life but follow Tesla. MATT MILSOM: It’s crazy. JOHN HEMPTON: One of my staff for first Tesla
is a short seller distributed denial of service attack. [LAUGHTER] It’s so spectacular and such a
sort of car wreck that every short seller is just focused on Tesla. And there’s all this stuff out there that
they’re ignoring. And they’re ignoring it because Tesla’s so
god damn interesting. MATT MILSOM: Not as big. JOHN HEMPTON: It’s big. But it’s colorful. When Valiant finally blew– and they made
the Netflix documentary– it was so colorful in the end. It was hysterical. The idea that a company registered a couple
of hundred fake pharmacies so that they could send prescriptions to insurers without the
insurer knowing where the prescription came from– MATT MILSOM: Hiding in plain sight. JOHN HEMPTON: –and all of those fake pharmacies
were named after characters in Stephen King novels. MATT MILSOM: Right. JOHN HEMPTON: Right, I mean, that’s bizarre. But Telsa’s that bizarre every day. MATT MILSOM: Absolutely. JOHN HEMPTON: It’s like– MATT MILSOM: Well,
we’ll see. JOHN HEMPTON: We’ll see. But I don’t want to play the Tesla denial
of service attack because there are other things to do with your life other than watch
Tesla. MATT MILSOM: Absolutely. Speaking of which, I saw you off shore recently,
Japan? JOHN HEMPTON: Yeah, I was in Japan. And two weeks of that was visiting companies. And one week was with my wife. MATT MILSOM: Potential longs? JOHN HEMPTON: All potential longs, although
we found a few shorts on the way, too, because we can’t help ourselves. MATT MILSOM: And micro caps, or? JOHN HEMPTON: Everything from micro caps to
large caps. But we have a sort of mystery. The Japanese mystery is you keep finding these
companies that should make pot loads of money and don’t. And you’re wondering whether they don’t make
pot loads of money because the management have their fingers in the till or because
they are incompetent or because they’ve got lifetime employment obligations or because
they have obligations to their account parties so the money goes out via suppliers. In some Japanese conglomerates, that’s clearly
the case, where you have a company that is part of the Toshiba group. And all the profits disappear because they
buy overpriced services from other Toshiba companies. MATT MILSOM: And cross-holding-based or just
relationship? JOHN HEMPTON: Relationship based, and most
of it is so opaque that the chance of a Westerner like me understanding it is something approaching
zero. I have an example we’ve been talking about,
which is a company called Takasago. And I doubt you’ve ever heard of it. And not having heard of it means you’ve missed
nothing in the world. Flavors and fragrances are an astonishingly
good business. This is the business of providing a small
part, but a high value part, to, say, a food or a cosmetic that gives it its flavor, its
texture, its odor, and its branding. MATT MILSOM: Like the probiotic story. JOHN HEMPTON: Yeah, the probiotic– thing
version. That’s how we found these things. The biggest flavors and fragrances company
in the world is a French Swiss company called Givaudan, which is also one of the finest
companies I’ve ever seen. And I went to their investor day in Jakarta,
of all places. It was a bad thing that everybody at a food
company’s investor day got food poisoning. [LAUGHTER] Which is classic. I blame the hotel. It was a five star hotel. But I blame the hotel. But it was really bad. I promise you. But Givaudan’s offices were a bit like a sort
of Willy Wonka Charlie and the Chocolate Factory experience. They have, for instance, rooms that they set
up with coffee beans in them. And you walk in. And every one has a slightly different smell. And then they’ll show you these smelling chips
you put to the nose. And there’s 500 different slight variance
in the coffee smell. And then they will sell a coffee smell to
a chain of cafes. And you walk into the cafe. And it smells like this really authentic coffee
shop. But in reality, the smell is coming through
the air conditioner provided by Givaudan. And that smell becomes the branding of the
shop. And they will never sell the same flavor or
fragrance twice. So one of the rooms they showed us had a bunch
of smelling chips. And you put one to the nose. And it was Dove soap. And you know it was Dove soap. You’ve smelt Dove soap all your life. They made the fragrance 70 years ago. They’ve never sold it to anybody else. And it’s a beautiful locked in business. A small parts of a big thing, lots of pricing
power, very high switching costs. Now, there are four big flavors and fragrance
houses in the world and lots of little ones. The four big ones are Givaudan, which is French
Swiss International Flavors and Fragrances, which is a stock that you will know if you
have read Phil Fisher’s books– it’s one of the stocks in Common Stocks and Uncommon Profits–
a German one called Symrise, which is the number four, and the possible number– the
number two in fragrances and number three in flavors, which is a privately held company
in Germany called Firmenich. And these are fantastic businesses. High teens margins have grown forever. Very high switching costs. If you go back 30 years ago, there was a fifth
one. MATT MILSOM: The Japanese one. JOHN HEMPTON: The Japanese one called Takasago. MATT MILSOM: What happened? JOHN HEMPTON: That’s a good question. Takasago say that their stated margin objective
is 5%. When I went to Jakarta, the Indonesian people
at Givaudan used to talk about the big five. But the only market outside Japan where Takasago
has made an impact is Indonesia. They have not spread in any meaningful way
to the west. They have some astonishing technology. The most important piece of technology is
that they develop– that they have a catalyst business inside the company. And catalysts are also a fantastic business. It’s a small part of a big process. But it’s the bit that determines everything. So you get lots of pricing power. And they invented a catalyst that could catalyze
molecules forming either right handed or left handed. So molecules can be symmetrically one way
or the other. But they have different characteristics if
they’re one way versus the other. But it was always hard to make left hand ones
versus right handed ones. And they had a catalyst that did that. And believe it or not, it’s one of the few
companies I know where their own research stuff won a Nobel Prize for doing that. This should be astonishingly profitable. And it’s not. And they don’t take meetings. We’ve tried and tried and tried to get a meeting
with them. They have some English language material but
primarily because they want to sell stuff. They have a quarter of the margin they should. And this is a bad thing because, if you don’t
make enough money, you don’t do R&D. If you look at Givaudan, which is the best
company in this space, Givaudan has 10,000 staff. And only 3,000 are in manufacturing and the
backend. The other 7000 are in pure R&D and development
for customers. So almost all of the staff are in the front
end of developing new business. And if you have a fat margin, you can spend
more money developing new business. Takasago has gone from being a genuine number
five 30 years ago to an — MATT MILSOM: You’re not long. JOHN HEMPTON: No, I’m not long. And yet it has astonishingly good technology. And it has genuine leadership in some parts
of f it’s the synthesis thing that– the main product from that is menthol, which you can
get from peppermint by refining or you can get by synthetic root. And they originally had a monopoly on the
synthetic root. And then Symrise, the German company I mentioned
earlier, also developed the synthetic root. And eventually, BASF, the big German industrial
chemical conglomerate, the mega cap, developed the synthetic root. But when they had an absolute monopoly on
synthetic peppermint or menthol, they should have ruled the world for a while. And they never did. And it’s like this is Japan writ large. You find these companies with these utterly
beautiful positions that, for some reason or other, just don’t– waste it. And you’re sort of pinching yourself and thinking,
god, I wish I could give the CEO a big pile of options. If you gave the top 10 brass a big pile of
options and said, go out and get as rich as you can, then wonders would happen. MATT MILSOM: But it’s not America. JOHN HEMPTON: It’s not America. And it’s like Japan– America has too much
incentives on management. And they do stupid things because they’re
incented by options. MATT MILSOM: And the buybacks, therefore–
JOHN HEMPTON: Well, we’ll talk about buybacks. And Japan has not enough. Yeah, America the classic is, you give the
person too many options, they’ll buy back stock. And of course, they’ll buy back stock when
they’re selling their own stock because, you know, what’s a buyback for? MATT MILSOM: Yeah, with debt. JOHN HEMPTON: Right, and they’ll lever themselves
up. And there is a golden variety of the absolute
case point, which is General Electric. And General Electric is a pretty bloody good
company. Its jet engines are amazing. The technology that they just sold to Danaher,
which was technology for membrane separation and for making various proteins and biologics
was also amazing. Their are equipment is still the best in the
world. And yet the company is near insolvency. And the only reason its near insolvency is
it bought back $100 billion worth of shares. It also spent $10 billion buying Alstom, which
might be worth minus $10 billion, and a couple of other mistakes. But if GE had only bought back $70 billion
worth of shares, nobody would be stressed about it at all. GE is the poster child for bad incentives
producing bad results. MATT MILSOM: Or a tipping point of leverage. JOHN HEMPTON: Yeah, but the bad incentives
were all the way down. For instance, you had staff who were awarded
based on various stated profits. And so anything that could advance profits
advance all right? And leave risks entails rewarded them. There’s a JP Morgan analyst who’s really negative
about GE. But his simple observation is that, over the
last 15 years, the top five staff have had $1 billion in take home pay. And you know, I thought I was well paid as
a hedge fund manager. But I just don’t cut it. MATT MILSOM: Not trying hard enough. JOHN HEMPTON: I’m not trying hard enough. But yeah, but this GE problem is written all
over the place. My favorite example of buying back too much
stock is Mattel. And Mattel make boys’ toys and girls’ toys. And girls’ toy equal Barbie. And boys’ toys equal Matchbox and Hot Wheels. And actually, it’s a pretty hard business. And they haven’t run it really well. And the reason it’s a hard business is goddamn
obvious, which is computer games. Once upon a time, you could sell a Matchbox
car to a 9-year-old. If you showed a Matchbox car to a 7-year-old,
7-year-olds just want Mario Kart. The only people that buy Matchbox cars are
3-year-olds and creepy 40-yearold men. [LAUGHTER] MATT MILSOM: Not I. JOHN HEMPTON:
And the company bought back literally billions of dollars worth of stock. The debt is trading is sort of good single
B. But the difference between good single B and bad triple C is not very much. MATT MILSOM: What’s the ratio of the CEO to
median employee? Do you know what I mean? JOHN HEMPTON: Yeah, I know what you mean. And I don’t know. I never actually looked. But Hasbro has done absolutely everything
right for 15 years. And by doing everything right, your sales
are about the same as 15 years ago, a little bit higher. But Mattel has not done everything right. And some of the things they did wrong I would
never have understood. Like my favorite example– which I’m not a
consumer person, so I don’t get this at all. But when it was pointed out to me, I go, oh. So I’ll tell you, American Girl dolls– these
American Girl dolls were ridiculously expensive. But you took your five-year-old to the salon. And she’d have her haircut. And the doll would have a haircut that was
identical. MATT MILSOM: Bless. JOHN HEMPTON: And you’d walk out in identical
sets of clothes. And the dearest dad would be down a few hundred
dollars. It was an incredibly profitable business. It had $700 million of revenue. And then they decided to sell it in Toys R
Us. MATT MILSOM: Not quite– [INTERPOSING VOICES]
JOHN HEMPTON: –completely destroyed the cache. The revenue went from $700 million to $200
million. Now, for the life of me, I don’t understand
how to sell to consumers. I just don’t get it. But it’s still pretty obvious ex post. MATT MILSOM: Yeah. JOHN HEMPTON: They’ve sort of stuffed it up. MATT MILSOM: Hindsight, a powerful thing. JOHN HEMPTON: Hindsight’s a powerful thing. But you could stuff up American girl. Or you could buy a few billion worth of shares. But doing both was sort of a scary mistake. And it’s like, can I take some of this Japanese
conservatism and sprinkle it over– MATT MILSOM: But there is reform going on there? It is changing, maybe not by activists, but–
JOHN HEMPTON: I haven’t been there enough to know that. The people that know it tell me that it is. And they keep saying, think about it being
slow. So for instance, in the corporate reform with
cross shareholdings, you either have to sell them or justify them. MATT MILSOM: With a one liner? JOHN HEMPTON: You just have to justify them. And so– MATT MILSOM: It was cheap. JOHN HEMPTON: You see people selling them. And then when they sell them, they buy back
an equivalent amount of stock. So their first buyback, so we’re seeing buybacks
across the board in Japan. And when you go ask them, why did you buyback
the stock? They said, because of that– because we had
to. Not because it was optimal for the shareholders,
not because it would make the management rich, which is the American reason for buying back
stock, but just because there was some kind of corporate law reform. We were sort of aching for somebody that said,
yeah, we bought back the stock because it was cheap. And here’s the measure of cheap. And here are our measure of what opportunities
we have to grow the business internally. And yeah, we’ll grow the business internally
if it’s optimal to do. I was just waiting for a Warren Buffett view
of the world. But I wasn’t getting it. And I thought the chance of my getting it
became thinner and thinner. Now, there were some exceptions. I’m not going to name names. But we went to see some micro caps. And where the micro cap had a family shareholder
and the family shareholder was rational, you had at least fairly good governance because
the governance was that the family shareholder kind of liked their lifestyle. And in one case, the father had taken up with
his mistress in the south of France. And the son was running it. And in fact, it was quite clearly run for
the benefit of shareholders, which included the father in the south of France. MATT MILSOM: Self-interest. JOHN HEMPTON: And self-interest is a pretty
good motivator. I just sort of wanting to sprinkle a little
more into Japan. MATT MILSOM: You came away with some longs
or? JOHN HEMPTON: I came away with some longs. But nothing that felt like it was unambiguous,
just stuff that felt really cheap and with some optionality around it. MATT MILSOM: Value traps, potentially? JOHN HEMPTON: If they’re buying back stock,
at all, probably not, but the risk is the same risk that you’ve had in Japan for a long
time, which is you buy a really good company. You wake up in 10 years. And it’s a slightly less good company. And it has accumulated a large amount of cash. And the stock has gone sideways. Then there were things in Japan that just
scared the willies out of me like lifetime employment is a real thing. Established Japanese companies do not fire
people. And they do not buy them out except at the
most extreme level of reluctance. But they fire nobody ever. And we asked about it. And they said it would be a national scandal. That was the end of the answer. If you have high technology plus lifetime
employment, it’s a scary combination because the nature of high tech companies is that
they have beautiful global monopolies that last for three years. And you have to be able to deploy the profits
of this to try and develop the next one. And if you don’t develop the next one, you
basically sell yourself. Or you fade away. But lifetime employment means the employment
ramps up the big pile of cash because they did make some genuine profit. But for the next 15 years, all that cash goes
out the door to pay their lifetime employment obligations, the most shocking misallocation
of resources. MATT MILSOM: But there are Western practices
coming in. There’s a SoftBank. These are mega caps where they’re changing
slowly. JOHN HEMPTON: Very– if the Western practice
is, we make up our accounts, then we did find some frauds. MATT MILSOM: Through the database? JOHN HEMPTON: No, a database doesn’t work
very well in Japanese because mostly it’s about chasing names. And we’re not very good at chasing Asian names. We just haven’t computerized it the same way. I have an intern who’s just sitting over there
listening. And he knows a fair bit about– he can speak
Mandarin. So we are thinking about using him in part
to work out the systematic ways of chasing Chinese names. MATT MILSOM: So your bottom up approach, you’re
not thinking of whether we should– obviously, not thinking about whether we should be in
yen and therefore– JOHN HEMPTON: No. MATT MILSOM: You go on the trip with the specific
alpha in mind, the next– JOHN HEMPTON: Yeah, look. We went look– there are lots and lots of
cheap shares in Japan. We’re not sure we own any of them, even if
we buy the stock. A lot of time, it was very straightforward. When you said, why did you buy back shares? It’s because we have a 7% ROI target. And we buy buyback sufficient shares in order
to meet the ROI target. Yeah, they’re not lying to you. They really do have a 7%– and guess what? You’re going to make 7% return if the business
doesn’t implode. And if the business does implode, you’re going
to get screwed. 7% return’s OK. But given it comes with a lot of risk, I’m
generally not that interested. MATT MILSOM: So what’s the geographical breakdown
currently? JOHN HEMPTON: Look, we find shorts more easily
in the US. And we find the longs more easily in Europe. So if you looked at us, we are about 70% short,
50% of which is in the US. We’re about 60% or 70% long in the US, and
about 50% long in Europe, with a few incidental things in Australia and in Japan and things
like that. MATT MILSOM: But no currency hedging? JOHN HEMPTON: Very little. I’ll go back to Christian Hanson, which we
don’t own. If it’s in, of all things, Denmark, which
still has its own currency. Quasi pegged to the euro, but it still has
its own currency. The crown goes up, Christian Hanson’s profits
go down because– MATT MILSOM: Inherently hedged. JOHN HEMPTON: It’s inherently hedged. If we owned a Danish– which we wouldn’t–
a Danish retailer, then we actually got a currency exposure. We’ve never mathematically optimized that
currency to work out what our true exposures are. What we might do is say do some regressions
of our portfolio against various currency movements and pick the currency hedge that
minimizes the volatility of the portfolio on the basis that we have no ability to pick
currency. But anything that reduces risk is probably
a good idea. But we’ve never done that. Most of the stuff we have is inherently pretty
hedged just by its own business. There was a quarter a while back, which was
where the euro went from $1.30 to about $1.10 in a quarter. And in the same quarter, the European stock
markets had their best quarter in like 20 years. And if you looked at it measured in US dollars,
our Euro positions were just a wash. Stocks with great. Currency was awful. They matched. MATT MILSOM: Like Sterling at the moment. JOHN HEMPTON: Yeah. MATT MILSOM: But let’s not go there. JOHN HEMPTON: Let– let’s not go there. Brexit is just a dog’s breakfast. The joke about British politics is that it
exists to make Australian politics look competent. [LAUGHTER] MATT MILSOM: Savagery. JOHN HEMPTON: They’re both pathetic. We are a little worried about it, though,
because one of the hardest positions we are in long is Rolls-Royce. We’ve owned it for a while. And it just looks like a Brexit dog’s breakfast. Now, GE and Rolls-Royce are a global duopoly
in wide body engines. And wide bodied engines, they’re going to
sell a lot of over the next 15 years. The most fuel efficient plane in the world
is an A350. We’ve checked that with pilots. It hasn’t had any notable problems. It’s not a 737 Max. A global duopoly and a growing business selling
a high tech product with vast amounts of revenue should be as profitable as hell. And it’s not. And it’s not through a variety of mismanagement
problems, some of which they’re probably getting to grips with. But if Takasago is a Japanese company that
is under earning, Rolls-Royce is a Western company that is underearning. And it’s not underearning by a little bit. It’s underearning by an astonishing amount. For years and years and years, GE’s jet engine
business had a margin that was 25-ish, 25 to 30. And it was real. The cash was largely all taken, buybacks and
then some. But nonetheless it was real. And Rolls-Royce is lowest single digit. That company could, conceivably, earn 5x what
it currently earning, certainly 3x is easy. And it’s never failed to disappoint. MATT MILSOM: But you’re still long. JOHN HEMPTON: I’m still long. It’s just that it’s one of these positions–
I went on a factory tour there. And the factory tour was just good fun. What boy does not want to go to a jet engine
factory? If there’s privileges in this job, one of
the privileges in this job is the ability to go to a jet engine factory every now and
again. And we walked around and saw various bits. And the most impressive bit was the testing
room at the end. And the testing room, you walk into a sort
of linoleum covered thing that looks a little like my kitchen with a few computers sitting
around. And it doesn’t look very impressive. It’s the control room for the testing room. Then you go through a pair of lead doors and
walk down this set of stairs through, maybe, 10 feet of concrete and lead into an underground
hangar the size of a football stadium with jet engines strung up on cables and cable
tied to the wall and big that black marks where the engines had been firing into the
walls. And now you’re in the set that looks like
a James Bond movie. It’s astonishing. And there’s an X-ray machine so powerful that
it could take your chest X-ray at eight miles. MATT MILSOM: Wow. JOHN HEMPTON: And they use it film the inside
of a jet engine when the jet engine is running. Now, it turns out that every testing room
in– the testing room is the single most capital intensive part of the whole jet engine manufacturing
process. Every jet engine comes in and spends a week
on the testing beds while they do everything to make sure it really works. They x-ray it from all sorts of angles. And fire it. And burn lots of fuel. And make lots of noise. And every engine that comes back after its
five year maintenance haul also goes through another week of testing. So you can sort of work out how many planes
there are in the world and how many planes are on their order book and five year maintenance
cycles and how many testing rooms they need. And it turned out that they needed many more. And these testing rooms were about 100 million
quid each. And we sort of did the back of the envelope
and worked out that they had about half a billion pounds to spend on testing rooms. And they had done the back of the envelope
by the time I was in the factory. But quite literally, they hadn’t even done
that back of the envelope calculation three months before we met them. That is, they had pre-sold all these engines
on the A350. There’s a forward order book as long as your
arm. And it’s pretty obvious they’re going to be
profitable. I think, touch wood. But they haven’t even worked out how much
capital they needed for the ramp up. It was the weirdest case of engineers not
thinking through finance. MATT MILSOM: So you’re going to stick with
it? JOHN HEMPTON: We’re sticking with it. I said that three years ago. And the stock is sideways. MATT MILSOM: Decent yield? JOHN HEMPTON: No, they actually halved the
dividend along the way. And they had to halve the dividend because
suddenly they realized, oh my god, we’ve got to spend half a billion dollars on testing
rooms– half a billion quid on testing rooms. So this has just been a hard situation. And I was sort of cheered when ValueAct, who
are actually pretty good at this sort of stuff, got involved and bought 10%. And ValueAct just trimmed their position the
other day. MATT MILSOM: Uh oh. JOHN HEMPTON: And I’m thinking, uh oh. I’m getting a tiny little bit squeamish here. And ValueAct and I are actually fairly good
friends, primarily because I was on the other side of Valeant rather. And they held this huge mega position in Valeant. And it’s kind of mutual respect because I’ve
looked at the things that they’ve done really well. And they’ve done them really well. And they seem to respect me because, when
they made a mistake, I spotted it. So it’s a nice situation. But Rolls-Royce also has the most complicated
supply chains you could imagine. There are millions of parts that come from
all sorts of places. Each part has to be tracked, x-rayed, tested
for integrity. Expensive and complicated process, making
jet engines. And you look at it and think, Brexit? This is diabolical. MATT MILSOM: Outside of customs union? JOHN HEMPTON: Outside of customs union. MATT MILSOM: Oh! JOHN HEMPTON: Now, we had some Brexit hedges
on. I’m not going to tell you what they are because
I want to put them back on later. MATT MILSOM: OK. JOHN HEMPTON: But the only stock we have that
scares me for Brexit is Rolls-Royce. And it’s sort of also a measure of the irrationality
of the whole thing. There was a town in Wales where the only big
employer was the Airbus consortium. And they had a factory with a few thousand
people working for Airbus. And the town still voted majority for Brexit. What were they thinking? It’s the same– MATT MILSOM: Not well explained. JOHN HEMPTON: Not well explained, anyway. So there’s– Brexit just looks bizarre to
me. But then so it’s politics at the moment. There was a consensus in politics from Margaret
Thatcher to about five years ago. And the consensus was that free markets and
liberalism was the way to get rich, good rule of law, free markets, free trade. And there was a left wing of that consensus
and a right wing of the consensus. And then the right wing– MATT MILSOM: Way
more extreme now. JOHN HEMPTON: And the right wing of that consensus
said, yeah, and freedom and free markets and getting rich is an end in itself. And that’s good. And the left wing of that consensus said,
and yeah, getting rich meant that we could had a more robust tax system. We could afford a welfare state. We can afford environmental protections, et
cetera. But they both agreed on the free market data. They don’t even agree on that anymore. MATT MILSOM: It’s not free market. JOHN HEMPTON: They don’t agree on that. No, no, there’s a perfectly respectable view
that says, you have a neutral tax system that takes 35% of whatever. But you have an otherwise completely even
playing field. 75% of your profit is still a pretty good
incentive for most people. Or 85%, 70%, or 65% of your profits, you know,
it doesn’t kill incentive. It just dampens it a little. MATT MILSOM: But it’s the access to capital. Inequality is just driven higher by central
bank action. So if you can’t get access to capital– JOHN
HEMPTON: Yeah, I am firmly on the left wing of that view, which is that, by and large,
markets are the way to get rich for the whole of society. But you need to have a tax system and welfare
systems and an education system, so you don’t leave large classes of people behind. And the cost of leaving large classes of people
behind is becoming apparent at the moment. And the cost is, ultimately, this is a democracy. And they vote. And you either treat them fairly, you treat
everybody fairly in some sense– MATT MILSOM: Or face the unrest. JOHN HEMPTON: Or face the unrest. And Brexit is the classic example. There was no rational reason to vote for Brexit
other than it was opposed by the elites. And I want to stick it to them. MATT MILSOM: It was the marketing, I think,
inherent in the NHS. JOHN HEMPTON: Yeah, but you know– The marketing
was appalling. MATT MILSOM: It was lies. JOHN HEMPTON: Both sides, incidentally. MATT MILSOM: One side didn’t try very hard. JOHN HEMPTON: No because they thought they’d
win. MATT MILSOM: Yeah, arrogance. JOHN HEMPTON: Yes, but that seems to be–
MATT MILSOM: A common factor. JOHN HEMPTON: A common factor these days. It’s sort of annoying because the free market
delivered a lot of goods. The post Margaret Thatcher globalization of
the world worked in a very, very big way. It just worked somewhat unevenly. And then add in free money, a central bank,
and asset price inflation. And then it worked extremely evenly. I don’t want to pontificate about it. I just need to work out how not to lose client’s
money. MATT MILSOM: Excellent. JOHN HEMPTON: Because that’s really the job. Well, my job is, of course, wealth inequality
is fine. Most of my clients are rich. And I want to keep them that way. MATT MILSOM: OK, it looks like we have run
out of time again. I never got criticized last time for bringing
it to a very abrupt close. But we’ve got more interviews to do today. And great to see you again, John. Thank you very much indeed. JOHN HEMPTON: Thank you.

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100 thoughts on “Short Selling Tesla and Japanese Businesses (w/ John Hempton)”

  1. I guess if I were big oil and making nearly a billion a day, I would also fund shorting Tesla, too. They stand to lose billions….soon.

  2. I don't want any stock because of impending recession, but Tesla has a big, big future. This guy is ranting about vin numbers and just doesn't get it.

  3. There is a bit of a "true believer" vibe to Tesla supporters, but I think a large part of that is them being defensive because they feel people are being unfairly critical. And I kinda get where they are coming from.

  4. Get this guy off air. He just likes hearing himself yak. It’s heinous. His points are such bs.
    He shorts a stock because he didn’t like one guy in it???

  5. The market and the public for that matter is just beginning to price in how advanced their electric motors are. The two will be forced to once Porche starts funneling sales from Mercedez, BMW, Audi and VW

  6. 28:00 Perhaps I don't understand the yogurt business but what is stopping any other companys from cloning/breeding these bacteria? Send me an expensive bacteria/charge too much for it…I just let it sit and multiply and low and behold I have more of it, thus not needing to buy it from you. Bacteria is cheap and easily grown. Perhaps I'm missing something?

  7. It's true that Tesla is currently struggling with manufacturing quality but that is because they are re-engineering the way cars are manufactured from the ground up. Just look at what they have planned for single body machine pressing and wiring harnesses. These are new techniques that, once perfected, will dramatically reduce costs and allow for much larger production capacity. If Tesla can survive in the medium term and get these processes rolled out, it will put them as far ahead in total car manufacturing as they presently are in motor and battery. An economic crash could bring Tesla unstuck, like so many other overly indebted companies.

  8. TSLA, unfortunately, both sides are right. As soon as the ChiComm factory is fully functional & stuff is trained Tesla will be bankrupt & a new ChiComm company will take over.

    ….. my question is how much is your TSLA then? $420? $240? $120? or just TSLAQ?

  9. This guy is comparing Tesla quality with Volkswagen? VW are some of the worst quality cars out there. When you buy a Tesla, you are not buying great fit and finish. You are buying the ultra high tech components like battery, motors, crash safety, software, apps, etc.

  10. Talk is cheap. Skin in the game. Interview someone whether long or short whose career and reputation depends on the outcome please.

  11. If I were the Emperor of Ice Cream I would make John Hempton’s discussion with Matt Milsom compulsory listening every year for every high school student in the United States to illustrate how a great business brain operates.

  12. Well build quality has improved dramatically, and its getting way cheaper. Two examples of them being way cheaper than traditional motor companies.

    Cooling: Traditional companies have multiple cooling systems for engine, battery, and passangers. Tesla has one clever, compact, and cheap system.

    Wiring: Traditional wiring is in the KMs, Tesla a few months ago got it to meters.

    The SEC has been very weak with Elon though, anyone else would be in jail.

  13. An insightful look into the concealed narcissism of a professional shorter. I consumed it all, right to the end. Twas telling that Mr Hempton could not understand the very deliberate choice of that small Welsh community and could only articulate cliches in attempting to understand Brexit. No doubt simple common sense is a large part of his success, but it is the common sense of the fat and well fed baffled by the logic of the dispossessed. “What were they thinking?" Indeed. I am sure Mr Hampton does not know and never will simply because he really does not want to know: he doesn’t need to.

    If historians simplify the past and economists idealise the present there is something to be said for the shallow analysis of the Hedge Fund Manager in trying to predict the future. Again, a very interesting discussion and very much appreciated.

    7/10.

  14. Tesla I'd be long on. Elon is the man for electric cars. It's clear by the interview that it's harder than he thinks to make electric cars. Clueless idiot.

  15. 6:50 "This guy really has changed the world… There are a lot of hedge fund managers who are nowhere near that competent"
    Whether you believe Elon is running a fraud or not that sentence tells you too much about an economic system that rewards those with talent (and arrogance) for working in financial wizardry hoping that those who do the real work of changing the world fail. And you wonder why interest rates and growth are zero.

  16. I think business people just cannot see the hard work that goes on to start a company and be a game changer. Combustion engine should be criminalize by now. I pray that you will be wrong. I think Amazon was also not making any money for a long time.

  17. What an arrogance… So funny that so many people don't get it … at all. Short sellers should be banned, its a parasite way of investing and partly causing the crash as well.
    Every EV manufacturer is stuggling on the mentioned topics. I own a Ipace, believe me, it is full of flaws 🙂 But I dont mind, an EV is a delight compared to an ICE. Im sorry for all the other manufactureres, to catch up is the only thing they can do.

  18. Tesla's stock jumped today because in a "leaked" e-mail: "Elon Musk said the company “has a shot” at delivering 100,000 cars this quarter, which would be a new record."  Last quarter they delivered 95,000–talk about growth!   What a nothing burger!

  19. This guy has no idea about technology, happy to hear he can loose his short investment. Thinking Toyota that went on Hydrogen and fuel cells are clever enough to compete with Tesla demonstrate my point. Even NVIDIA can't compete with Tesla's chip. As Ford said, any fool can produce but to sale you must be a genius. Elon Musk didn't spend a penny on publicity.

  20. shut it off at 5 minutes. Disappointed that RVF has such drivel on. Hempton says Tesla has bad quality (everybody who owns one loves it), then says Volkswagen (the guys who had to buy back all the diesel cars they lied to us about in the us) is going to do a better job? Then, he starts talking about some vin number conspiracy nonsense. Really disappointed in RVF – unsubscribed.

  21. "Brexit looks bizarre to me"

    Of course it does – you're one of the global 0.01% who have all the wealth, all the power, who directly benefit from globalist ideology, who have no attachment to any country, and who have never experienced any of the downsides of the policies you push on the rest of us.

    So of course you find it "bizarre". You don't live on planet earth.

  22. Apparently this idiot hasn't seen all the Teslas on the road. They're flying off the shelves. I'm a truck driver and I see truckloads in the truck stops.

  23. "Problem with socialism is eventually you run out of other people's money."
    erm… who's money? The gov. is giving money for free to the market so they can have an economy. Unless you would go back to the goldstandard first.
    The system right now (Keynesian) is spending other people's money through central banks interest rates. The people are in perpetual dept to the central bank.
    Socialism has no central bank.
    That being said, I'm not a very big fan of MMT either. The market itself can work out means of trade, be it gold, bitcoin… Then the analogy of running out of other people's money would be correct.

  24. I came here to learn about an intelligent, well argued bear case for Tesla, and all I heard is the same old cliches and smirks we see everywhere. Comparing Tesla to Toyota is like comparing Google to the Old Phone Book. The "manufacturing quality" is just not what it used to be back in the old days. What's next, we should go long coal, using the proceeds from shorting Tesla? Stay away from this dude's fund. It is very prudent the the short is "tiny".

  25. He misses the big picture with Tesla. He doesn't get its a platform for developing the technology for self-driving cars. Tesla is literally a million miles and years ahead of all the other car companies. They've already developed an AI computer designed exclusively for self-driving vehicles, no other company has. When Tesla achieves the first self-driving cars, other car companies will have no choice but to buy Tesla technology, or be left years behind. That's when the money pours in.

  26. Lost me at around 6:30 when he said Elon is an amazing guy. He's a complete fraud. Building cars in TENTS. What is Tesla, a circus operation? Solar City got bought by…Tesla. That's like the gov't buying their own bonds. Oh wait… And Fake-X is the biggest fraud of all because it's not even possible to venture into "outer space." NASA openly admits they cannot go beyond low-Earth orbit. Cannot go back to the moon. I don't fault anyone for simply repeating what they have been taught of this world since birth. But once you learn the truth of things, it's IMPOSSIBLE to go back.

  27. Boy is that interviewer a gimp.! “Absolutely” gets his comments backwards, showing he believes the opposite of that the guy is saying. LOL. Great interview. But the interviewer would be best in another line of work.

  28. So there is no evidence what so ever that there is something sketchy with Tesla. There is 25 red signs, that we didn't get to hear. With this level of reasoning you could as well let a monkey throw dart on which company you should go long and short on.

  29. The only bit that made sense was that Tesla needs loads more dosh to invest in being able to lower their production costs to rival the likes of Volkswagen

  30. Tesla's revenue is growing at 80% a year. Solving their financial problems would be as easy as improving the interiors, customer service and increasing the price of the vehicles.

  31. Have to say, however, this idiot is very charismatic. If I was an oil company I would even give this guy money to spew his nonsense.

  32. John Hempton will fail his short with Tesla due to Elon's first principles thinking. Solar roof tiles, production quality and efficiency, debt management. These are all problems which get crushed by first principles thinking. Get out of that Tesla short John.

  33. Business minded folks don't get Brexit at all, it's hilarious listening to people who live for money trying to work out why someone would vote against their own financial interests…. The irony is, poor people don't really care about money as much as rich people… Poor people care more about having neighbours they chat with over the garden fence…. I don't know if rich people become rich because that's all they care about, or if becoming rich overtakes their whole lives and then slowly becomes all they care about – but it's a striking difference between the salt of the Earth Brit, and the mega-rich London financiers, which the financiers simply don't get.

  34. It seems that he doesn't understand vertically integrated companies very well. The biggest mistake is to evaluate Tesla along the same line of legacy car manufacturers. Tesla is so at least 2-3 years ahead technologically, specifically in battery tech. Every other car manufacturer is just buying parts of the shelf. The lack of internal development will mean that the optimization across the whole vehicle will always put legacy car manufacturers at a disadvantage. Their inability to reach the range/KWH efficiency of the 2012 model S only emphasizes this point further.

    It seems entirely plausible that Tesla will make improvements in manufacturing efficiency faster that legacy car companies will develop battery, self driving tech, and software equivalents to Tesla's offerings. The criticisms of Tesla from a manufacturing perspective is not the quality but rather that Tesla is spending too much by over engineering portions of the body when they could produce the same part for much less.

    Additionally self driving and the whole robo taxi future seems like a massive boon for the company that is not taken into account at all. All teslas sold are fully self driving capable. The moment this becomes street legal, your car can generate income for you passively. The economics change entirely. Some might debate whether the legislation will get on board but the recent introduction of Tesla insurance will be extremely important in the coming years regarding this.

    What about China and Gigafactory 3 Shanghai? The factory has gone from muddy farmland to completed mega factory in under 9 months. China is the largest EV market by far and Tesla is the only non domestic brand that can produce domestically. The price of model 3 will be the same as its US produced counterpart but it will be produced for much less. Every other imported car has to deal with a 25% import tax. Tesla can avoid this entirely and is poised to take the Chinese market by storm considering Tesla's offering beats all domestic Chinese Ev's in all metrics except price.

    I just feel that the short position is one that is not researched. This is coming from a person who likes the company but owns no stocks. I am just honest about the big picture of this company.

  35. He said at 1:11:37: 'There was no rational reason to vote for Brexit other than it was opposed by the elite and I want to stick it up them.'
    You're an intelligent man Mr. Hempton but you just don't get it. You think Brexit was, is, and should be all about economics and wealth, ie: money.
    It wasn't, isn't, and I think it shouldn't be.
    This is our very last chance to preserve our country's independence from an unelected self-serving self-appointing oligarchy – the European Commission.
    Some things are priceless. Independence is one of them. People die for it you know. A bit of temporary hardship is of little consequence when issues like this are at stake.

  36. I-Pace has nothing on Tesla in terms of drivetrain efficiency, charging speed and infrastructure, infotainment, OTA updates and a whole host of other areas that cater to actual utility in the real world. I'm sure it has a lovely interior, better panel gaps and so on but that's not what really matters to consumers which is demonstrated in sales figures. Jaguar can hardly give them away for free.

  37. The problem that Toyota and VW and all the other ICE manufacturers have that Tesla and other start-up EV companies don't have is they WILL have to write-off huge amounts in transmission & engine plant and equipment if they want to transition even a fraction of there production to EV on top of the additional cost of electric motor and battery pack production!

  38. Don't get such jokers ,I've just started liking this channel, what a waste of time .. could not proceed more than 20 mins .

  39. So he's basing his whole short thesis on Tesla having a low manufacturing quality? Go out and check a 2019 Model 3 and tell me where you see bad manufacturing quality. Go on, I'll wait. And then he's talking about Toyota as a threat to Tesla's cars. Toyota!? The only car company who doesn't have a single BEV out yet and none announced for 2020? Yeah, no. You should worry more about Toyota getting left behind if they keep faffing about with HFC while everybody else goes BEV.

  40. This guy does not realise the ice carmakers just don’t even want to do electric cars it messes up their whole system dealerships negates the rest of their range they don’t get profits going forward they’re behind in battery technology behind engine technology behind his self driving technology they don’t have over the air updates it just doesn’t know much

  41. When Tesla has to throw a bone in battery technology to their competitors, it paints a grim picture for ice automakers.

  42. All of this info is out of date now. Not sure why this was posted today. He really looks like someone who hasn't been paying attention for the past 6 months.

  43. These baby boomers so call hedge fund managers have zero and I mean ero understanding of technology. They keep comparing Tesla to GM, Toyota, VW. Tesla is not not just a car company the are a tech company with unlimited potential! In 10 or 15 years their revenue will come from so many different sectors, selling cars alone will be at the bottom of their priority list. I guess you can't teach an old dog new tricks

  44. Love my Tesla Model 3s (yes we have two), love my Tesla PowerWalls and Solar Panels (we don't buy from the grid). I've got A LOT of TSLA shares and I'm long for 20 years. Beat that John Hempton, with your puny short position. This year 400 thousand more Tesla customers, how many of them do You think go long (like me) on TSLA when they realize what they bought?

  45. Dude said he had a very “small” position. That’s what most short sellers always say so when they get short squeezed they’ll have a recourse to say it was only a small percentage.

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