Paul Singer | Podcast | In Good Company | Norges Bank Investment Management

Activist investing is taking a position largely in an equity security of a company and trying to engage with the company to improve outcomes, control or influence outcomes, to unlock value. It could be management changes, capital structure changes, financial strategies and tactics, anything that will make the company earn more money, be better positioned, more rationally deploy assets.

Well, as you know, the trend away from active investing—and by active investing I don't necessarily mean activist, just active investing means you open the mail from the company you invest in, try to understand the company strategy, maybe call the company with suggestions. But active investing is next to passive or index investing. Index investing now accounts for a plurality of money managed, particularly equity money around the world.

We develop ideas from a variety of sources. Given our position in the marketplace, sometimes people bring us ideas, sometimes the street brings us ideas, sometimes we ferret out ideas ourselves. The first thing we do is an iterative process: we develop a set of questions different for every industry and run down the questions. We talk to a lot of people: former employees, customers, Wall Street analysts. A consequence of the trend towards index investing is that there's less research coverage from Wall Street. We try to become as informed as possible, ascertain the local landscape in terms of culture, the culture of capitalism, corporate control. We try to understand the board of directors and management: how they got there, what their strategies are, why they're failing. We don't get involved with highly successful companies that can't be improved.

The perfect situation is a company that has an open door. By open door I mean something's been going on for a long time. The founder or one generation from the founder feels a moral obligation to the local shareholders or the family doesn't want to give up the longstanding strategy or capital structure or alignment or location of headquarters. When we come knocking, we not infrequently find an open door. In an open door, it's a different discussion. If we're right—and we're not always right—and there's an important segment of the leadership that agrees, then it's a fairly smooth path to getting things done.

It's a very interesting question. One thing that is crystal clear and endemic: hardly anyone tries to stiff-arm us. There's the occasional, and there's a playbook for that. We have one firm, one fund, and it's large—about $72 billion. We have the wherewithal to back our thesis and pursue our approach. Almost everyone picks up the phone. The advisers all tell them, 'Elliott, you should pick up the phone, engage with these people. They're dealmakers.' And they do. Some approaches are under the radar, some we file a disclosed position, others we don't disclose to the public. We disclose to the company. It depends on the rules and our strategy. A detailed discussion and a deck—my guys like writing decks, piles of paper with graphs.

In other words, we're not Crusaders, we're not just speaking to hear ourselves speak, we're not engaged to read about ourselves in the FT tomorrow morning. We have a goal, a thesis. If our thesis is right and the company takes steps—which is not always—getting all of our requests is not rare but not dominant. We're generally pretty right, and the things we suggest generally are creative and add value. The company that engages with us, it's a minority that stiff-arm us and have knock-down, drag-out proxy fights or lengthy litigations. That doesn't really help anybody, but sometimes it happens.

I'm going to define successful as we get a meaningful percentage of what we asked for and the stock reflects it over a period of time, so our ideas actually add value. That's the only way we can maintain our reputation. The proportion of cases in which we're adding value is close to 100%. The proportion in which it's reflected in action, movement of structure, capital structure, directors, is probably a majority—like 70%. Not 90, not 80.

I have a variety of political, philosophical, and philanthropic outlets for my compensation. But I do think we make the world a better place, not in every single situation, but this style of investing enhances the possibility and probability that enterprises can serve their customers. Competition is good. At the most basic level, we have like a hundred universities, hospitals, charitable trusts. Because we are not just an activist fund; we are an absolute return fund, meaning we want to make money whatever the market does. In infrequent adverse financial market environments, these people have very few investment outlets that actually perform.

Sometimes it's bad luck, but more frequently we missed something. Or the hedges weren't the right hedges; the tracking error was much more than we expected. At the beginning of my career, 1977 to 1987, hedging was much simpler because we were long a convertible bond and short the stock into which it was convertible. Tracking error wasn't a factor. We've become much more sophisticated in hedging, creating bespoke hedges, but even those don't work out exactly all the time. The worst trades are the ones where you misunderstand the risk and put it into the wrong category. I'll give two brief examples: one moderately horrifying and one really bad. The moderately horrifying one: a peer sold us a late-stage bankruptcy in a deinking plant. It wasn't late stage; there were important bankruptcy elements not settled, and the deinking plant didn't really work. We lost money. The really bad one: an arbitrage position in Japanese index-linked bonds. The arbitrage was perfect: Japanese government bonds against inflation-linked bonds. The Japanese CPI was bouncing around zero for decades. The dealer showed it to us, and the price implied minus 2% inflation per year for 7 years. We thought it was a sure thing. It went from minus 2% to minus 4.5% per year, and the inflation linker went down 30% in price. We lost a lot of money. We held it, and it matured six years later, but we had lost 30% of the principal. Many people were sold out of that position because they misunderstood the risk and levered up. We kept the trade, but it was painful.

Elliott was formed in 1977 when I was accepted to Harvard Law School. My father, a retail pharmacist, was sure I was going to be a big shot and that I had to learn how to invest. I was a psychology major and had no idea why I was going to law school. My father and I traded speculative mining stocks and tech stocks. We lost money in every way possible: short selling, long puts, short calls. I was an early adopter of the CBOE options exchange. That culminated in a catastrophic loss in the 1974 bear market. I was long stocks on margin, and at one point I was down 88% on $50,000 of my mother's savings. My desire never to lose money again was a combination of wanting to get my parents' money back and the feeling of devastation. When we formed Elliott, I realized I could manage money and make money all the time through convertible hedging. Along the way, I observed that when people have meaningful losses, they lose their minds and judgment. If you can keep your capital intact during rare periods of special opportunities, like the last few weeks in 2008, you can take advantage. So if you don't lose large amounts, capital acts like a ratchet. My clients never held me to a benchmark. The brilliance of our approach is that we don't benchmark ourselves; it's don't lose money, and whatever's left is the rate of return.

No, I'm not doing it to make my father proud. I keep doing it because I think we do it well.

I get this question. The reason I basically get this question is that I dig in. I'm enthusiastic about it. It can't be boring if you think about what you read in the newspaper, which is largely distorted. There's no cookie-cutter thing at Elliott, so there are challenges. We never have a position profit celebration. No cake, no champagne. But on this topic of fun, you can't get bored by not losing serious money. The reason for burnout is sharply diminished. Burnout is largely people drained of emotional energy by adversity. You can't predict markets, so that's another dominant cause of me seeking never to lose money. If I want to be risk-averse, I have to be risk-averse all the time.

In our lines of business, if someone is not burnt out or bored or fading in capacity, the experience and wisdom is so needed. In today's world, the layer of understanding beyond the spreadsheet and the horrible lawyers telling you you have a 95% chance of winning that antitrust suit and then you lose—it's that.

Argentina, somewhere in the late 90s, early 2000s, the debt started trading down. Many people thought they would default. We knew they had a history of default, but they were coming out of being the seventh or eighth largest economy in the world, lots of resources. We didn't think it was a good idea, and we didn't think they would default. They defaulted, and the bonds collapsed. It was a long time before they gave their first offer. Sovereign restructurings come in different flavors. Argentina is a real country. After an extraordinary period of time, they came in with a 29 or 30 cent deal. A 30 cent recovery for a sovereign restructuring might be appropriate for a Guatemala or Honduras, but not Argentina. 25% of the holders held out. The country said if you don't accept, you get nothing. They got a few percent more in a second try three years later. At the end, there were about 60,000 bondholders, including five hedge funds, of which Elliott was the largest. Our basis was down into the teens or 20s. It kept trading down. It was in litigation for 15 years. They never accepted our offer to negotiate. They never put a deal on the table. They were an example of stubborn, entitled behavior.

Absolutely.

Just about as risky as I've ever seen. I think the long period of time since the last major market event has led people into thinking they'll always be bailed out, that there'll never be another bear market like 1974, 1987, 2008. Leverage is building, risk-taking is building. Those statements also apply to governments. It's astonishing: negative interest rate policy in Europe, Japan, Switzerland, and zero interest rate policy for 10 years in the US. It's crazy. In the pandemic, you added shockingly high spending deficits, deep recession type programs, at a time when there was no real recession. This fiscal year, over 6% of GDP deficits in the US. Valuations: this AI is way over its skis in terms of practical value being brought to users. There are uses and will be additional uses, but it's way exaggerated.

A point we have recently made is that it is true that central bank money is conjured out of thin air, but it has sovereign support. To the extent that governments embrace cryptos, they are embracing alternatives to sovereign money. So is the money supply going hog wild because of all these cryptos? What are the potential implications for the dollar as the world's reserve currency? That's the point. If governments are supporting or endorsing cryptos, it's an alternative to the dollar. Countries around the world are not happy with the privilege the US asserts as the reserve currency country. They'd like alternatives. The dollar sits astride the world with all the abuses of that status, and the US itself is conjuring or supporting an alternative to the dollar. It makes my head spin.

I like rock music and I have a couple of bands. I play keyboards, proper rock and roll.

I used to read science fiction, but I mostly read trade books, research. It's kind of overwhelming at this point given how complex markets are. I don't have time to read fiction anymore.

My advice to those people has been and is unchanged over a long period of time. I value a broad classic liberal education. They should not take business courses in college. They should take as much history, political science, philosophy, religion as they can fit in. You can specialize in business later. If you specialize too soon, you get a narrow deep skill set and you're not equipped for the things actually happening in the world. That stood me in good stead. Being a lawyer has stood me in good stead, although my partner is not a lawyer but thinks like one.

Thank you.