Max Ward – My Mistakes as a Fund Manager

4 December 2023

Mistakes are our passion at our wonderful library – most of the time it’s someone opining on the errors of others but every so often we get an individual confident enough to talk freely about their own experiences.

As a Christmas treat, we had such an event on 4 December 2023 when Max Ward discussed what he learnt from his mistakes as one of the UK’s best-known investment managers.

Max has just retired after an outstanding five decades as a fund manager with Baillie Gifford and the Independent Investment Trust.

In a lively conversation, he discussed his experiences, reflections and lessons with his former colleague Peter Hollis. In particular, Max talked about “going through the wringer”, a period of prolonged agony that he believes is unavoidable for all long-tenured managers of other people’s money.

As Keeper of the Library of Mistakes I hope that you will enjoy learning from Max in this video, a remarkably successful investor who is humble and honest enough to admit to, and reflect on, his mistakes.

The event took place on 4 December at the Library of Mistakes, 33A Melville Street Lane, Edinburgh, EH3 7QB. Drinks were kindly provided by Kennox Asset Management after the event.

Lecture Transcript

Russell Napier

The Library of Mistakes does podcasts and lectures and is a free public library. There is one in Switzerland, we have one in India and we are talking about a few others all around the world. The charity that owns The Library runs a course in finance called the Practical History of Financial Markets. It backs a programme called Future Assets, which tries to get schoolgirls interested in careers in finance. And it is now backing education in the schools, basic personal finance in the Lothians. I’ve obviously mentioned all that in case you’d like to make a donation. Lauren is at the back also selling fantastic Library of Mistakes merchandise — just in time for Christmas, for the biggest mistake in your life.

So please, welcome everybody on such a foul night. I’m playing virtually no role tonight except to introduce my friend Peter Hollis. We joined Baillie Gifford on the same day. Peter went on to become a partner at Baillie Gifford. I’ll hand over to Peter to talk about Max and then interview Max and run the rest of the evening, thank you.

Peter Hollis

Russell, thank you. Good evening, everyone. This library is of course the brainchild of Russell. I think he’s created a marvellous facility for anybody who’s interested in financial history, decision making – especially flawed decision making – and human behavior. So, if you’ve been here before, welcome back. If this is your first time, I hope you’ll come again.

My name is Peter Hollis. I’m here to chat with Max Ward on stage tonight. After that, I’m going to open the floor to questions from you, the audience.

I spent much of the 1990s working in the UK department at Baillie Gifford — a team that was led by Max. After 50 years of investing other people’s money, Max retired last year. I think 50 years alone is a testament to his professional expertise. But I think what is interesting is that Max is not just good, he was good in two entirely different environments.

The first environment, his first three decades, was at Baillie Gifford. For most of that period, Max led the UK department, which, believe it or not, in those days was the most important team in the office in terms of the money it was managed, and therefore was really at the heart of the firm’s success.

But I think a far more significant and important element than just leading a successful equity team, is that Max left an enduring professional legacy at Baillie Gifford. It was Max’s personal credo that emphasized:

  • one, thorough bottom-up stock analysis, with the associated disdain for the big picture, top-down economics and politics.
  • It was Max’s credo that emphasized investing in good companies, defined by those where you believe the underlying growth of the company was sufficient such that one could simply buy and hold the stock rather than having to trade it.
  • And third, not least, it was Max who advocated a brazen bullishness. And that is a bullishness in investing, a bullishness in business, and a bullishness to life. For Max, the glass was always half full.

The second phase of Max’s career was at the Independent Investment Trust, where he operated as a lone investment practitioner. I think that in this period one can more easily quantify the extent of Max’s investment nous. So, for instance, over the whole 22 years of The Independent’s life, Max compounded its net asset value at 9½% annually. To put that in context, the British stock market over that period compounded, including dividends, at 5% per annum, and the world index compounded total return 7% per annum.

But we’re here not just because Max had a long and successful career. We are here at the Library of Mistakes. An endearing feature of Max’s character is his openness, humility and honesty in talking about his own mistakes. So, with that said, I hope you can all give a warm welcome to Max Ward. [Applause.]

Max Ward

Thank you.

Peter Hollis

Max you started work in October 1971. That’s quite a long time ago. Can you, if your memory is up to it, tell us something about the environment then, perhaps how investment management was different?

Max Ward

Yes. There are several different features to this, but let’s start with the status of investment managers within the financial firmament. Now, we all know that they are the rock stars of the firmament, but it wasn’t so in 1971. We were certainly well down the pecking order from brokers and from corporate financiers. Indeed, there’s a very nice story in Peter Stormonth Darling’s book, City Cinderella, of how one Christmas Day, Siegmund Warburg rang him up and said, for “God’s sake, get rid of Mercury Asset Management,” which was the Warburg asset management business.

Peter tried to get rid of it, but fortunately he failed. And when Warburg was eventually taken over, it turned out that Mercury was worth more than the whole of the rest of Warburg. That is a measure of the way in which attitudes to investment management as a business have changed.

I think that another huge change since then has been in the investment landscape. Back in the 1960s and ‘70s, everything was controlled – there were price controls, dividend controls, exchange controls, and all of these distorted markets. But I think the most interesting and probably the most powerfully distortional were exchange controls.

In those days, all direct overseas investment had to be channeled through an essentially fixed pool of investment currency. And because the investment currency was always in short supply, the investment currency rate was always at a premium to the commercial rate of exchange. That premium was known as the dollar premium. And the real sting in the tail with the dollar premium was that whenever you sold an overseas security, you were allowed to keep three quarters of the proceeds as investment currency, but one quarter of the proceeds you received at the commercial rate. So you were effectively surrendering a quarter of the premium from the proceeds of every overseas sale. Now, the dollar premium was frequently at 25% or higher, so that meant that your transaction costs when you were selling could be swingeing, and this acted as a massive disincentive to investors to invest overseas.

So throughout the 1960s and 1970s, portfolios subject to UK exchange controls had a much lower overseas content than they would naturally have had. And if you look in particular at the pension funds at that stage, an awful lot of those had very little in overseas securities. So, there’s been a dramatic change in the investment landscape.

Moving on from that, there’s been quite a dramatic change in the fees that investment managers have been able to charge.

Peter Hollis

Indeed, Max, you talked about price controls. When I look back at the fees — were there controls on investment management fees?!

Max Ward

No, because most of them were decided on an ad valorem basis. Baillie Gifford was exceptional in that. Baillie Gifford carried on with negotiated fees for its investment trusts right up until the ‘80s. As a result, it fell way behind the market.

So, for example, in 1965, and I’m indebted to Peter for this figure, the Scottish Mortgage fee was equivalent to eight basis points [of assets]. By the time I took over Scottish Mortgage in 1989, we’d moved on to an ad valorem basis, and the fee was at either 20 or 21 basis points. By the time I finished as manager of Scottish Mortgage, the fee had risen to 32 basis points. So I have a dubious distinction of being the manager who achieved the biggest rise in fees in Scottish Mortgage. I had therefore given a tremendous gift to my successor, James Anderson, who was the first manager of Scottish Mortgage to preside over a period of fee reduction since the 1970s. The fee for Scottish Mortgage at the moment is 30 basis points up to the first £4bn, and 25 basis points thereafter. So, quite materially below the level when I left.

Peter Hollis

So, we’ll be talking to the senior partner of Baillie Gifford tonight and suggest that eight basis points [is the objective]?

What about yourself, Max? When you started in the ‘70s, can you recall how your ideas to investment evolved, and when you started running money?

Max Ward

Can we first deal with regulation? That was going to be my fourth topic. Regulation was very limited in the 1970s. It was really quite a wild west atmosphere, and insider dealing was rife and front running was rife.

We actually had our own personal experience of this. Looking back to the mid-1970s, Baillie Gifford’s second largest client was an investment trust called Edinburgh and Dundee. One hot August afternoon at about four o’clock in the afternoon, our senior partner, Charles White, received a telephone call from Edinburgh and Dundee’s broker to say that there was ominous buying of Edinburgh and Dundee shares in the market by four brokers who were known in the market as the four horsemen of the apocalypse. [Laughter.]

The reason they were known as the four horsemen of the apocalypse was because their buying invariably presaged a takeover bid for the stock that they were buying. Fast forward to five o’clock that afternoon. The telephone rings; it’s a merchant banker to tell Charles White that his client, the British Rail pension fund, was going to make a bid, or had actually made a bid, for Edinburgh and Dundee. Now, in those days, insider trading was not a criminal activity, but it was very much frowned upon. And if you were caught doing it, you got a severe reprimand from the stock exchange.

In this case, none of the four horsemen received any form of reprimand from the stock exchange because their client was a Swiss bank which was widely believed to be acting on behalf of a member of a corporate finance team of the merchant bank that announced the bid. So the world was really in need of tougher regulation. The first iteration of the regulatory environment came in the late 1980s, and it was very sensible and proportionate. But, unfortunately, it failed to prevent Robert Maxwell from pillaging his pension funds. Since then, the regulatory environment has progressively tightened up, reaching its culmination in the ludicrous AIFMD.

Peter Hollis

Max, shall we call it a day there for regulation? Because we’re here to listen to you about yourself. Rather than having a go at the regulations — what about the way you approach investment and how it has evolved?

Max Ward

Well, should we start with roughly how I think about investing? My starting point is Soros’s observation that markets are reflexive. What that means is that the behavior of any market changes as the behavior of the participants in that market changes. And that led me to the conclusion, which I think Soros had reached long before me, that any rules-based system of investment was almost bound to fail in due course, because as soon as a sufficient number of market participants had followed the rules in their behavior, the anomaly that the rules were designed to exploit would be arbitraged away.

I have my own subjective perceptions of value and quality, which I use to justify most of my purchasing decisions. I have to say, I don’t very often use them to justify my selling decisions, which very often are more urgent, rather than the product of leisurely consideration of the merits of a business and its valuation. I have a bias in favor of cash generative companies. I have a bias against companies that defer expenditure from one accounting period to another. And I suppose you could put those two together and say that I really like companies with clean accounting – particularly ones where profit is a very close approximation to cash generated.

Peter Hollis

If you can transport yourself back to young Max, let’s say, 1980, you are head of the UK department at Baillie Gifford. You’re running money. What do you believe now that you didn’t then, or that you believed then that you don’t now? Is that possible to even transport yourself back?

Max Ward

Very much so. It’s quite a painful memory, actually. Back then, the concept of shareholder value was, I think, quite widely followed in America, but very few people talked about it in the UK. Almost no big companies ever mentioned shareholder value, which was just as well, because most of what they did in the way of acquisitions was destructive of shareholder value. I became a pretty early disciple of shareholder value. And as often happens, particularly for people with bullish personalities, when you become a disciple of one particular thing, you take your enthusiasm too far.

I think I was certainly guilty of that. I was in quite good company —Jack Welch, who ran GE, was the greatest disciple of shareholder value there ever was. After his retirement, he announced that he thought it was the dumbest concept he’d ever come across. My change of view is not quite as dramatic as that. But I do realize I took the concept of shareholder value too far: because there were so few companies who even talked about shareholder value, the ones that did seemed especially attractive.

My enthusiasm for shareholder value took me into an awful lot of conglomerates. And those conglomerates were pursuing acquisition policies that were entirely driven by earnings enhancement and often propped up by very dodgy accounting principles. The end game, looking back, is absolutely clear and should have been totally clear at the time. You end up with a whole bunch of businesses with no particular attractions and no common theme, all with rather dull prospects. So the life cycle of a conglomerate in the stock market was one of tremendous excitement on the way up and then almost a symmetrical disappointment on the way down. I think that I was extremely lucky that we probably made pretty good money out of conglomerates, but again, probably not for the right reason.

Peter Hollis

When I was a young boy at Baillie Gifford, I recall you describing your investment beliefs in simpler terms: you believed you could identify a better than average company and you hoped, or you believed, that you could avoid paying silly prices. How has your thought evolved – which aspect has proved actually to be more difficult than you expected?

Max Ward

I think identifying good companies. When I look back on the number of companies which I had tremendous enthusiasm for, which turned out to be duds, I’m really rather embarrassed by it. [Laughter.]

Peter Hollis

Interesting. And the silly prices is not something you feel particularly [guilty of]? It’s the business that [disappoints]?

Max Ward

This is a really difficult question. Somebody once did a calculation, I can’t remember who it was, probably Ian Rushbrook, as to what an investor should have paid for Microsoft on its first day of flotation, if he had a genuine ten-year investment horizon. It was something like 1000 times the price at which Microsoft was floated. So, if you really can find a good enough company, there is almost no limit to what you should pay for it. The trouble is spotting the Microsoft at that stage of its evolution.

Peter Hollis

It’s easy in retrospect. Not so much in prospect.

Max Ward

Exactly, exactly.

Peter Hollis

Are you going to say there are no universal lessons?

Max Ward

Yes! I think as my career progressed, more and more of the universal lessons I believed in started to crumble at the edges. I’d be happier now to say that there are no universal lessons.

Peter Hollis

Okay. We are in the Library of Mistakes. But what are your happiest memories? Or a favorite stock or two just before we get into the [mistakes]?

Max Ward

I think my happiest memories were of the mid to late ‘80s in Baillie Gifford.

Peter Hollis

I joined in 1989, just to clarify that. [Laughter.]

Max Ward

We just about include you in that. We were building up the UK equity team and we had very good people. We all got on very well together and by and large results were pretty good. So as a result of that we put on a hell of a lot of new business and everything was going swimmingly then. So that would probably be my [favourite time].

Peter Hollis

Do you have a favourite stock or two?

Max Ward

Well, my favourite stock in memory is the house builder Wilson Connolly, which was run by a guy called Mike Robinson. Mike Robinson was the first man to understand that house building was not about selling houses. It was about buying land. And if you run a house builder on the basis that buying land is the most important function, you run it in a completely different way to running it if you think the business of a house builder is just about selling houses. It’s a great tribute to Mike Robinson that almost every major house builder I know is now run on the basis that land buying is the absolutely central thing.

Many of the housebuilders that floated in the 1980s freely admitted that they owed their operational style to him. Mike was a tremendous manager. We first bought shares in Wilson Connolly in 1981, at which point it had been the single best performing share in the stock market over the previous ten years. So, we were quite late to the story, but we still made eight times our money by the end of the ‘80s. Even more surprisingly than that, we used it as a sort of prototype Baillie Gifford stock for about five years. Normally, when you picked a stock and used it as a prototype stock to use in presentations to potential investors, the whole thing fell apart within twelve months. [Laughter.]

It was tremendous. [But] it all had a sad ending. Mike Robinson dropped dead of a heart attack on a beach in Portugal in the summer of 1990 and nobody could fill his shoes. Wilson Connolly just gently descended into mediocrity before being bought by Taylor Woodrow in 2003. So all good stories come to an end.

Peter Hollis

Okay, we’ve been too easy on you so far, Max. The American restaurateur Danny Meyer said that mistakes are the world’s ultimate renewable resource. [Laughter.]

You’ve had 50 years. You must have had some low points.

Max Ward

We’ll talk about low points; I’ll come to mistakes later.

I think pretty well all fund managers, and I’m not sure the qualification pretty well is necessary, have periods of poor performance. And I think probably most fund managers have periods of terrible performance. If you’ve got a period of poor performance, as often as not, it’s probably a function of how the market is operating. Say you’ve been a small cap manager in the last couple of years. You’ve had a pretty grim time, even if you’ve been a good small cap manager. But if you have a period of terrible performance, there’s almost always an element of terrible stock selection in there, and that’s very demoralizing for you as you realize that you made all these silly mistakes and as a result, you’re in the most terrible mess.

I can identify three periods of really terrible performance that I had in my career. There are probably more, but I’ve got a constructive amnesia built into my brain. The three I remember were: one beginning in 1989; the second beginning in 2007; and the third beginning in 2018. One common theme of these three periods of terrible performance was that performance in the run-up to them had been very strong. So I think that suggests quite strongly that overconfidence was a common theme in them.

The first period of really poor performance I was quite lucky with, because I’d been in the business for over 15 years when it came along. So, it wasn’t fatal to my career prospects, which it probably would have been if it had come a bit earlier. I did actually offer to resign on the back of it, but Baillie Gifford was quite a supportive organization and my resignation was metaphorically tossed into the basket. But the thing I remember most about that first period was that it was interfering with my sleep pattern. Time and again I would wake up at three o’clock in the morning and spend hours worrying about my predicament to no constructive purpose at all. The consequence of that was that when I came into the office the following day, I was extremely tired.

Sorting out problems when you’re extremely tired is twice as difficult as it is if you’re functioning as a normal human being. So that was a really difficult aspect of it. Luckily, I found a way of coping with sleep deprivation. Well, I found a way of making sure that I did have a proper night’s sleep, by and large. So that wasn’t an issue in either the second or the third period of terrible performance.

Peter Hollis

What about the other aspects of coping with it at the office? Does one just double down, or do you give up on all your principles?

Max Ward

What you’re really asking me is how did I get out of it?

The answer is, in two of the three occasions I didn’t get out of it. In the first one, I just handed on the responsibility for the funds causing all these problems to other members of my team. [Laughter.] And to their great credit, they turned them around very nicely. So that was a very neat solution to the problem. And in the third period of underperformance, the US Cavalry in the form of the Monks Investment Trust came over the horizon and bid for The Independent Investment Trust, thus putting me out of my misery.

Peter Hollis

So you handed on the work, and you retired?! [and the third instance?]

Max Ward

Exactly. The third one, the middle one. Again, I was a little bit lucky in this one, in that I had a premonition that it was going to happen when Northern Rock blew up. I remember it vividly. I was lying in a hotel bed in London, listening to the news, and it just suddenly struck me, “God, this is awful. My portfolio could be custom made for Goldman Sachs to short in this environment”. So when I got back to the office, which was the following Monday, I set about selling very aggressively and raised a lot of cash in short order.

It wasn’t, of course, nearly enough cash, but it did at least give me a bulwark. By the time the meltdown came in the autumn of 2008, we had substantial cash balances and had also bought shares in electric utilities, in tobacco companies and in pharmaceutical companies. So we were slightly better protected from the storm than I had been in my first experience. I didn’t really get back on the horse again until 2014. I just woke up one day in 2014 and said to myself, “For Christ’s sake, I can’t carry on running The Independent Investment Trust where there’s a big chunk of the portfolio in stocks which even I don’t believe are going to deliver very good returns.” Luckily, the more aggressive stock ideas that I then developed then worked out pretty well.

Peter Hollis

There’s an angst here that if you haven’t run money for other people is hard to articulate. Ultimately, what we’re talking about is: how do you distinguish between being wrong and temporarily out of favor?

Max Ward

There’s no simple answer to that, but I think that when you start feeling that you’re temporarily out of favor rather than wrong, it’s probably a sign that your confidence is recovering. Because when you go through a period of terrible performance, it does destroy your self-confidence. One of the things I would say to people who are going through a period like this is, “Don’t, for God’s sake, believe that it’ll all come right within months or even necessarily a year or two. You’ve either got to hand over responsibility to somebody who starts with a clean sheet, or you’ve got to work through the whole cycle of losing self-confidence, forming a base, and then regaining self-confidence.” I think that’s a process that probably takes years rather than months.

Peter Hollis

This is slightly personal, but when you were trying to pick me up off the floor in the 1990s, when I was going through the ringer, you were kind enough to say to me that you would not invest with anybody who hadn’t been through the ringer themselves.

Max Ward

Absolutely! I would stand by that very much, nowadays. I think to prove that you are of the right mentality to be a fund manager, you have to demonstrate that you coped with a period of extremely poor performance. If I were interviewing people, I would have a bias against people who said that they never had a period of difficult performance. Now, we’re talking about imprecise descriptions here. I’m not sure I’d necessarily insist they’d had a period of terrible performance, but I would certainly like to know that they’d been through a period where they were really worried about performance and where it had had an effect on them psychologically, and how they coped with that psychological effect, and how they got back on the horse.

Peter Hollis

It seems there are some things that have to be experienced and cannot be taught.

Max Ward

I would agree with that. Yes.

Peter Hollis

There seems to be an amazing halo effect [for fund managers]. If your stocks have been doing well for two or three years, every aspect of your personality is seen as positive. So, you might be patient, or you might be alert and active, independently minded. When you have two or three years of your stocks not doing so well and perhaps underperforming, you’re suddenly regarded as not patient, but lazy and slow. And you’re not alert and active, you’re a busy fool. And you’re not independently minded, you’re bloody minded. How does one get away from that kind of [impression]?

Max Ward

Well, I think what really matters is how you see yourself whenever you’re going through a period of poor performance. You’re going to attract a lot of criticism which may or may not be justified, but almost certainly won’t help you to get back on track. How does one cope with it? Well, I think how I coped with it was trying not to be too aggressive while my performance was still under pressure. The one thing I really feel strongly about is you mustn’t do what a well-known fund management firm did in the final quarter of 1987.  They had lost so much money for their clients in the first three quarters that they decided they had to try to win it back in the final quarter. So they put 10% of all their pension fund money into Thailand, I think.

Peter Hollis

OK, we’ll find out who that is off air. [Laughter.]

What about specific mistakes, Max? Are there lessons to be learned from them?

Max Ward

I have given a lot of thought to this. It’s terribly difficult to group your mistakes into a general category, but let’s try. I think one of the commonest mistakes that I can identify was when first investing in a company, is failing to recognize where its real vulnerability lay. As an example of that, I would give you two investment decisions that I made in, probably, 2003. I had this splendid idea that it would be a good idea to buy furniture retailers. I knew that furniture retailing was a very cyclical industry. So I knew that you had to be absolutely sure that they had the balance sheet strength to cope with difficult times, because who knew when difficult times were going to come?

I checked the balance sheets, and they were fine. They were laden with cash, and they were entirely manageable in relation to the capital requirements of the businesses. What I hadn’t spotted was that these companies deliberately chose the 31st of July to compile their publicly disclosed balance sheets. The reason for choosing the 31st of July is it’s just after the summer sale. So you’ve got no inventory at all, you’ve got piles of cash, and it all looks very pretty. But if you fast forward four or five months where you’ve got all this inventory waiting for the January sale, you’ve got a completely different balance sheet.

In fairness to these companies, they didn’t borrow from the banks to fund their inventories. They relied on the goodwill of their suppliers, and the suppliers in dispensing this goodwill were very dependent on the support of the credit insurers. Come the autumn of 2008, there wasn’t a lot of enthusiasm for furniture retailing in the credit insurance industry. So both of my companies found that they were unable to get the inventories they needed, and both of them went bust. I think you can imagine what Lady Bracknell would say about that.

Peter Hollis

One of the comments I have heard you say in an interview, is that you always set out to be credulous.

Max Ward

Yes.

Peter Hollis

That’s not a comment most thoughtful investors make.

Max Ward

No, absolutely. Over the years, I’ve often been mocked for being credulous, but I’ve never been ashamed of being accused of being credulous. Without the willingness to believe, you’ll miss some great stories. For example, I always remember people mockingly saying about me, I don’t think anybody said it to my face: “Who on earth would pay five times sales for a fizzy drinks company?” And of course, they’re right – why would you pay five times? Luckily, I made ten times my money in that fizzy drinks company.

Peter Hollis

That’s Fever Tree.

Max Ward

Yes – that’s Fever Tree. So, the willingness to believe the implausible is, I think, a key element of investment success. While I’ve got you on that, I will tell you another example of my willingness to believe implausible suggestions which should have had a very unhappy outcome, but didn’t. When the company Eurotunnel was being floated, I went to the presentation; Baillie Gifford were not important enough at that stage to have their own one-on-one meeting. I went to the presentation, I listened to the management saying: this project is going to be finished on time; this project is going to be finished on budget.

Then I went away and I thought about all the motorways that had been built in Britain and I thought to myself, “and the traffic projections are going to be way too low, too”. So, we put our clients into Eurotunnel in quite a big way. Just after the flotation, the price came under quite a lot of pressure. Late 1987 was not a very good time for stock market, some of you will remember. We were able to buy lots more Eurotunnel. And for no very good reason between then and late 1988, the share price rocketed and we sold all our shares at a huge profit.

Fast forward three or four years. The project was way behind schedule, its cost was nearly twice what was originally projected, and the traffic projections turned out to be aggressive rather than conservative. So I was wrong on all three points, but my credulity had allowed us to make a sack of money in Eurotunnel. [Laughter.] And better than that, because it all happened in the final quarter of 1988, it was a difference between our being behind the index and ahead of the index, not just for the quarter, but for the year.

So it saved our record. If you know of a luckier investment story than that, I’d like to hear it.

Peter Hollis

So, Max, let me be a little provocative here. How do you think of that? was Eurotunnel a mistake?

Max Ward

Yes! Unquestionably.

And there’s an element of me that is deeply ashamed of having been suckered by that.

Peter Hollis

So you can make a mistake and yet make a profit in a stock? and you make the right decision but lose in stocks? Is that what you’re saying?

Max Ward

I’m saying that in order to capture the big winners, you have to embrace ideas that more cautious investors would not touch.

Peter Hollis

There’s so much to unpack in that, Max. I think I’ll have to leave that to questions afterwards. There are so many threads to pull there. And the role of luck as well – we could sit up here for two hours talking about that.

Max Ward

Absolutely. I still don’t know whether I had any skill as a fund manager or whether, in the words of Taleb, I was just a lucky tosser. [Laughter.]

Peter Hollis

Coin tosser, that was. [More laughter.]

Max Ward

Yes, of course.

Peter Hollis

Why don’t we change tack a little bit? I’m intrigued by your two working environments and comparing and contrasting an institutional framework and a lone wolf.

Max Ward

It wasn’t very high on my list of reasons for leaving Baillie Gifford when I did. But there’s no doubt about it, I made several mistakes in my attempt to adapt to the change of Baillie Gifford from the little firm that I joined. When I joined Baillie Gifford in 1971, there were 35 employees, there were seven partners and £300m under management. When I left in 2000, there were 220 people, there were 20-odd partners, and there was £20bn in assets under management. That’s quite a dramatic change in not just the scale of the business, but the way in which the business was run.

I didn’t adapt to that as well as I probably should have done. That was a factor in leaving when I did. But I think my personality is probably better suited to working in small organizations than it is to working in large organizations.

Peter Hollis

There’s a few of your ex colleagues from the 1980s and ‘90s UK department here [in the audience]. As far as I can tell, your performance was definitely better when you were on your own than when we were helping you at Baillie Gifford. [Laughter.]

Max Ward

Well, I think that’s definitely down to luck. No, it’s very interesting. I have this very strong view that once an investment management firm reaches critical mass (by which I mean it’s got a sufficient revenue stream to pay all the costs and provide decent salaries to the staff that are needed to run it) any further expansion of the business has a harmful effect on the ability of a firm to meet the existing clients’ objectives. I say that for two reasons. The first is liquidity. The bigger you get, the more of a constraint liquidity becomes.

The second [reason] is people. As the firm grows, you get more and more people involved in the investment function. I think you’ve got to be very clever to prevent that from clogging up the investment function. If you have a team of five people presiding over the decision, the decision will almost certainly take longer to materialize than it would if you’ve just got one or two people. Because of that, it becomes more and more difficult for the firm to achieve dramatic changes in policy – in other words to be agile in markets – as it gets bigger.

Peter Hollis

And agility helps.

Max Ward

[Yes.] I think agility is a very valuable commodity, because when things happen, when Covid happens, when the global financial crisis happens, when the great stock market collapse in 1987 happens, you wouldn’t always act, but you at least have the capacity to do so if you’re small.

Now, there are two particular problems with being a lone wolf. One is that you haven’t got the restraining influence of colleagues around you who don’t share your opinions, which I always find more of a hindrance than a help. But I can understand how it’s actually a beneficial feature of a business. So, you’re probably slower to spot your mistakes than you would be in a larger organization. The second problem is that being a sole practitioner, you have only a limited range of opportunities that you could really concentrate on. When we started out The Independent, I imagined that we would always have a significant exposure to overseas equities. Over the life of The Independent, I bought quite a lot of overseas equities. I’m struggling very hard to remember one where we actually made money. So that’s a clear indication of my going beyond my comfort zone.

Peter Hollis

Max, imagine that you were running £10bn or £20bn at The Independent. Why don’t more brains, more analysts, more people help the investment results? There doesn’t seem to be any correlation between [results and resources]. I’ve seen Scottish firms advertise with worn out brogues, suggesting that its analysts are covering the world, and this is a great selling point.

Max Ward

One of my great bugbears is investment management firms taking on people purely to be analysts. Now I fully understand how in any investment management firm, you want to have your investment managers train as analysts. But I think to keep them on as full-time analysts is a mistake.

From my perspective, there are two reasons why you might want to hire your own analysts if you’re running an investment management firm. The first is that you believe that you can get a higher quality of analyst than would be available through your broking contacts. And the second is that you believe that having your own analysts will give you access to information in a timely way that you wouldn’t otherwise get.

I think both [reasons] are complete nonsense. What you’re doing is just putting another layer in the whole investment process. And the more layers you have, the more difficult it is to get crisp and timely decisions. I remember vividly doing a pitch to Scottish and Newcastle for UK equities. The finance director, who was chairman of the board of pension trustees, said, “Look, why should we come to Baillie Gifford? You’ve only got eight people in your UK investment department. We’ve just been to see, Morgan Grenfell. Morgan Grenfell have got 22 people in their UK department. They do five-year business models of every stock they cover.” I said, “Christ, what a waste of time.” [Laughter.]

What a waste of resource, too. Anybody who’s ever looked at a business model knows that it breaks down with the first set of results. [Laughter.]

I do think that one of the mistakes that fund management firms made was in believing that because they had so much more money to play with, they could follow the American example and win the war by just putting more people in. I think for most part, they had the same results as America had in Vietnam.

Peter Hollis

You’ve described your approach in the past as vague and flexible.

Max Ward

It’s got vaguer and more flexible, too.

Peter Hollis

How did that go down with the consultants?

Max Ward

Oh, an absolute disaster! [Laughter.] There was a constant tension within Baillie Gifford between the investors and the marketing department, because the marketing department wanted this clear message. Two things always had to be part of our investment approach. One was style and the other was disciplined process. In other words, rules-based investing. Because what you were trying to con the customers into believing, or the consultants into believing, was that there was a replicable process which, if you plugged in the right inputs, would always deliver superior figures. I think that is completely for the fairies.

I tell you something else which is a very unfashionable viewpoint too, and that is that no consultant would look at anybody with anything other than a very good recent record of performance. I think that if you start by limiting yourself to people who’ve had good recent performance, you are actually increasing the odds against your making a sensible decision because all investment management firms have periods of poor performance and periods of good performance. If you really want to be successful at picking an investment manager, what you need is a firm that has the basics in place – the philosophy, the people, the organization – and find them when they’re a bit down on their luck.

Peter Hollis

And the philosophy should be vague and flexible?

Max Ward

Yes.

Peter Hollis

Let’s give you the benefit of the doubt, Max; you’ve been good at picking stocks over the years, with a few ups and downs, but [your record] is unambiguously good. Do you think you’re any good at, or would you have any confidence in, picking a good fund manager? Is that a completely different [skill]?

Max Ward

Would I go and work for a consultant?

Peter Hollis

No – have you been on a committee that’s had to pick a fund manager?

Max Ward

[Yes, but] I’ve always been extremely scared of doing it. I have almost never been at a presentation – the qualification “almost” is an important one – where [the fund managers] didn’t have exemplary records. So the first real point of value that I could add, namely that you want to pick somebody without an exemplary record, was ruled out before you even started. I certainly wouldn’t put myself forward as somebody that you ought to have helping you pick your investment managers.

Peter Hollis

Talk us through how you think, let’s say, with your own money. If weren’t going to pick stocks anymore, [how would you select a fund manager for your money]?

Max Ward

You’re talking here about all my personal prejudices, aren’t you?

Peter Hollis

Definitely. Max, what’s the last hour been about?

Max Ward

OK, first of all, honesty. I think a lot of professional investment managers, egged on by their marketing departments, find ingenious ways of blaming others for their mistakes. Whenever I see an investment manager trying to escape responsibility for his own mistakes, I cringe. You have to be honest. You have to be honest with yourself. You have to be honest with your customers.

Second point, and this one will surprise all of you, is I want my investment manager to be enthusiastic. I want him to be enthusiastic about the investments he’s making. I want him to enjoy the job that he does. (I should say that it could, of course, be a “she” but I’m still in the process where saying he or she seems to clutter up the conversation. So can we just take it as read that it’ll be he or she?) So, second, an enthusiast.

Thirdly, as we’ve already discussed, I want evidence that they’ve experienced and coped with a spell of poor performance.

[Fourth,] I want flexibility. I want the willingness to wake up tomorrow morning recognizing that quite a lot of what you believed when you went to bed tonight was actually wrong and that you needed to change in reaction to that.

Peter Hollis

There’s a Canadian investor called Francois Rochon, and he is a big believer that good money managers are missing the tribal gene – the willingness to step aside from the crowd. A more provocative way of putting that is: do you think good fund managers are missing something in their emotional intelligence? Are they emotionally stunted, Max?

Max Ward

I think they’re very difficult people to have in a team because the combination of qualities that you need to be really effective at this job are, first of all, you’ve got to have tremendous arrogance to go out on a limb in the first place. And secondly, you’ve got to have tremendous humility because so often when you’re out on the limb, you’re on the wrong limb. So you’ve got to come in afterward. And that combination, particularly keeping the two opposing features of it in balance is, I think, very, very difficult. I do think that an awful lot of great fund managers are very difficult people. Quite unusual people, I think, probably have a tendency to be lone rangers rather than team players.

Peter Hollis

One more question, and then we’ll open up to the floor. You’ve talked about your lows. You’ve had plenty of highs. Most people would look at you and say, you’ve had a much more volatile career than the average investor. Would you do it again?

Max Ward

Yes, I’d love to do it again. There was a very good program on television a few years ago by Stephen Fry. I don’t know if you all know that Stephen Fry is bipolar, and he’s always been fascinated by bipolarity. About 16-17 years ago, he persuaded the BBC to allow him to make a program on bipolarity. The essence of a program was to find as many famous people as he could, who he knew or who admitted to being bipolar, and going and interviewing them about all aspects of life as a bipolar individual.

All of these people have contemplated suicide. And most of them, including Fry, had actually attempted it. So you’re talking about people who really do get very depressed about life. He asked all of them the same question at the end of his interview, and that was, “If you had your life again, would you be normal or would you be bipolar?” And without exception, they all said, “I would be bipolar”. And when asked why, they said that, “Okay, well, the lows are difficult to cope with, but life without the highs would just be unthinkable.” One of them put it very nicely. He said, “Please don’t kill my demons, because you’ll kill my angels as well.”

I feel that life as an investment manager is pretty much like life as a bipolar individual. You have these wonderful highs which are just impossible to envisage not having, and then you have these terrible, terrible lows. But if you can get through the lows, I think on balance, you end up being better at your job. And I can honestly say that I have really had a lot of enjoyment and fulfilment from my job as an investment manager.

Peter Hollis

Well, I guess one wouldn’t do it for over 50 years if you hadn’t enjoyed it and had a bit of fun.

 

 

Audience Q & A

Hamish Buchan

My first question: do you think the consultants have added any value to the investment process?

Max Ward

There was a study done about this while I was still at Baillie Gifford, and it focused purely and simply on whether the consultants’ recommendations for manager change had added value or subtracted value. The results were really not very helpful to the consultancy profession. It showed that, as you would expect, if you keep chasing last year’s winner, you end up very often having next year’s loser. We lost a fair amount of business to a famous firm during the 1990s, and I remember doing a calculation about five years after this mass exodus of business and the switch from us to them had cost the customers over 1000 basis points of performance.

Hamish Buchan

My second question: there has been huge growth in the fund management industry. Has any value been created for the clients or are have the beneficiaries just been the fund managers?

Max Ward

I think it’s a mathematical certainty that active managers as a group will underperform. So, this is where the arrogance in being an active manager comes in. You’ve got to believe that you’re better than the average active manager, despite the fact that (because the financial rewards are so unbelievably high at the moment) the quality of intellect that is being attracted to this industry is astonishing. You’re absolutely right: as a group, active funds are bound to underperform. So all you can hope in being an active manager is that you will be better than your competitors.

Now there’s an interesting line of argument here that I used to use at Baillie Gifford, but it hasn’t really produced the goods it was supposed to produce. The argument is that as more and more people go towards indexation, so the process of price formation becomes more and more inefficient, which should provide tremendous opportunities for active managers. And you did start to see fund management firms gaming the changes in the indices, that sort of thing. But it hasn’t worked. What should have happened, if my theory was right, was that the performance of the indices would cease to be representative of the true performance of the market because the indexers would always be being forced to buy too high and sell too low. But that hasn’t happened.

And I’m running out of time to believe it’s going to happen in my working life.

 

 

Norman Murray

I note that some investment trusts are currently mixing unquoted private and quoted public equity investing. Do you think that the skills are similar for investing in private equity and quoted public equities? And what about the valuation complications for unquoteds in investment trust portfolios?

Max Ward

I have got to be very careful what I say here, because my successor has presided over a big increase in unquoted exposure at Scottish Mortgage. My perception is that has been a helpful aspect of Scottish Mortgage’s performance. But he would make the argument, I’m sure, that the sort of unquoteds that he is buying are not companies that were not ready to come to the stock market, but companies that chose not to come to the stock market. So he would say that the skills of assessing the investment would be very much the same as in quoted investment. But as far as valuation is concerned, I think each fund has its own set of principles, and my understanding of Scottish Mortgage principles is that they are pretty rigorous and that they are carried out by completely independent [people]. You can’t have a Peter Young situation where the manager decides what the unquoted was worth.

Peter Hollis

Max, rather than speculating about today, you were a partner at Baillie Gifford when Baillie Gifford did invest in private equities. What happened then?

Max Ward

It wasn’t a very happy experience. But then we were trying to invest in earlier stage businesses, which is where specialist private equity skills are of such value.

John Moore

AI is the great thing that people can get excited about now. If you were in the business today, would you be excited about AI or wary about AI?

Max Ward

One of the mistakes that I’ve made in recent years is allowing my credulity to wander into areas where it shouldn’t really have been allowed. That would be really talking about businesses that were genuinely disrupting the established world. It’s very easy to call yourself a disruptor, but, in my experience, quite a lot of the disruptors are not as successful as they would lead you to hope they were going to be. So I think that to the extent that I’ve wandered away from businesses and industries that I’ve known well, my experience has not been particularly happy.

 

 

Paul Riley

What’s your opinion on bitcoin and other cryptocurrencies as a whole?

Max Ward

Well, let me first of all admit that I don’t understand bitcoin, and therefore I wouldn’t invest in bitcoin. I understand that there are people who are much more intelligent than me who think that it serves a useful purpose, and I’m prepared to concede that I might possibly be wrong about that. But one of the things that you really hope for in a currency is some level of stability, and it fails that test absolutely hands down. You say “bitcoin and the other cryptocurrencies”. While I can understand the possibility that you might want a cryptocurrency, I can’t see how there is any benefit in having dozens of different cryptocurrencies. So I wouldn’t want to invest in bitcoin, but by God, I’d rather invest in bitcoin than any of the others.

Beatrice Falari

I have been interested in the different character traits that you’ve used to describe a good investment manager: arrogant, humble, bipolar, low emotional intelligence, works best on his own, resilient to the inevitable lows. As a young woman, trainee investment manager who is not possibly any of those things, do you have any advice for me? or do you think things have changed enough that the idea of the good investment manager has also changed?

Max Ward

Okay, one really important question here from me to you. One, do you enjoy the job? [Yes.] Two, are you enthusiastic about the stocks that you like? [Yes.] Well, you’ve passed the biggest test. You can work on the rest. Becoming bipolar is quite easy. I wouldn’t worry about that. You’ll pick that up very quickly. [Laughter.]

Jim Hunter

I liked your story about Eurotunnel. But you never mentioned what drove you to sell, and that always seems to be a difficult thing, deciding how and why you sell.

Max Ward

I was able to justify the valuation that it floated on, but my memory is blurred here. I think the stock doubled, and I think that the assumptions that you would have to make about traffic in order to justify the doubling of a valuation several years before the tunnel was due to open were so heroic that they were too much even for me.

But you’re touching on a very interesting subject, which is why do people sell and it’s something that the consultants are red hot about. They want to have a proper selling discipline. I find most of the decisions I’ve made to sell stocks have been spontaneous and they haven’t been closely argued on basis of valuation or prospects or whatever it is. It just felt like time you sold something.

 

 

Peter Hollis

I think we can all see why Max was such a big hit in front of the consulting industry. [Laughter.]

I wonder if I might just have a couple of words just to wrap up.

I do actually know one professional investor in the UK whose career has been as long as Max’s and who is still working. That is Peter Spiller at Capital Gearing. When I met Peter about a dozen years ago, he said to me that when he was a young man at the stockbrokers Cazenove, the partners had a working motto that was:

  • clients come first
  • don’t be greedy
  • and have fun

I’ve always thought it was the most marvelous credo for any professional services firm. And I’ve also always thought that I haven’t worked with anybody who in their professional life has exemplified that trinity more than Max.

In another profession, David Ogilvy founded the advertising agency, Ogilvy Mather. He once wrote that the best leaders are not just people who make good decisions, they are infectious enthusiasts, contagiously cheerful people, irrepressible optimists. To my mind, nothing describes Max better than irrepressible optimist. And I have certainly not worked with anybody who has so clearly shown me the benefits of irrepressible optimism – in investing, in relationships, or, indeed, in managing one’s own mental well being.

Max Ward

Thank you, Peter. That’s the nicest thing anybody’s ever said about me. [Laughter.]

Peter Hollis

I hope this evening has given you some flavour for Max, the investor and the man. And if so, I hope you’re going to join us for drinks afterwards, which I think are at the back of the room and very kindly paid for by Kennox Asset Management. And finally, of course, will you all join me and thank Max in the appropriate way. [Applause.]

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