#26 – The Pragmatist
Alec Cutler is a value investor who manages a highly successful low risk balanced fund, based in Bermuda. He has forthright views on markets.
SUMMARYAlec Cutler runs one of the best performing low risk global funds and has a pragmatic investing approach. In this interview, we discuss inflation and markets and what this means for stock selection. Alec explains his views on what makes for a successful investment team. And he explains the principles of investing he learned as a child from his grandmother, which still guide his investing framework today.
Getting into InvestingAlec wanted to be an investor since the age of 8. He was introduced to investing by his grandmother (similar to Beth Lilly in Ep 24). His grandfather had a seat on the New York Stock Exchange. HIOs wife inherited the seat when he dies and refused to sell it to her husband’s partners. She leased the seat as women in those days were not allowed to have seats on the NYSE but she didn’t like the offered price.
She learned about investing at cocktail parties in spite of an education well below her intelligence and became a highly successful investor. She would meet public company executives at these parties and learned about their stocks. She was a much better investor than her late husband and taught Alec some of the basic principles of investing:
the importance of cash earningsgood steward managementsthe importance of investing in products that matter and have staying powerand the gains that come from paying less than something is worth.
Alec has a very strong and extremely interesting view of the world. He highlights that institutional memory and anchoring are significant in investing. The first blip in a regime change is often ignored or is overcome by “buy the dip” which admittedly has worked pretty effectively to date.
Underlying this, however, is a tremendous amount of liquidity and stimulus which Alec believes has become an addiction. He believes that when we look back, the Fed encouraging the Government to spend money in the Covid pandemic was equivalent to going off the gold standard in 1971. Liquidity of $7tn was injected in just a few months and the Inflation Reduction Act will deliver another $2-3tn of liquidity. Alec says the economy is addicted to money and the market is addicted to money.
The last bubble created a massive misallocation of capital and the result is inflation. Alec thinks the biggest risk is if the Fed believes they can really get to 2% inflation, as he thinks the natural rate of inflation for the next few years could be 5%.
He believes the market is telling him to own TIPs and high free cash flow quality stocks. And as long as he is clipping good dividends, Alec feels he is being paid to wait.
Alec’s Investment ApproachAlec believes in having a diverse team. 40% are women, a deliberate strategy. (This must be harder to achieve than it sounds – we have been trying to boost the number of women listening to this podcast which is far lower than we would like – suggestions welcome).
Not everyone thinks the same and he classifies team members as storytellers or numbers people. Typically one of each group will review a potential investment. The team travels a lot and Bermuda is very accessible. Interestingly, in contrast to say Chris Pavese who sees his remote base in the Blue Mountains, away from the noise of New York, as a big advantage, Alec didn’t stress that as an attraction of Bermuda which was a personal choice for him.
Having a diverse team has enhanced their process significantly.
The Successful Investor
We joked about the CFA – you can be a highly ethical person but still fail their ethics exam. The qualification tells you where everyone’s baseline is. It weeds out a few, but it’s more knowing what everyone else knows.
There are three levels of investor in Alec’s judgment.
At the bottom level, having a passion, the maths, the spreadsheet ability and the accounting knowledge are all taken for granted.
At the next level, can you learn from your mistakes?
At the top level are the few special people with an innate ability to recognise patterns, no fear of being wrong and an uncanny ability to overweight their future winners. And it takes a long time to prove that you are any good.
ABOUT Alec Cutler
Following a spell in the Navy, Alec joined Brandywine, now a $66bn firm, working directly with founder Tony Hitschler, then one of the top value investors. One piece of advice he gave was after periods of acute success, he would come into Alec’s office and say “Great job! This too shall pass”.
Alec stayed with Brandywine until Tony retired then moved to Orbis in Bermuda. In 2012, he started a moderate risk global fund. He was attracted to balanced funds and there was a gap in the Orbis portfolio and the fund has performed extremely well.
Alec recommended two books. He likes Stocks for the Long Run by Jeremy Siegel as a primer on the history of markets and believes that you need to be a historian as an investor. His other choice is a biography of Leonardo DaVinci which focuses on how peculiar he as and how he thought out of the box.by
Buy on amazon.com Buy on amazon.co.UK
How to Think like Da Vinci by Michael Gelb
Buy on amazon.com Buy on amazon.co.UK HOW STEVE KNOWS THE GUESTSteve met Dan Brocklebank of Orbis at a conference and Dan introduced them. Steve and Alec share very similar views on the long term outlook so immediately got on, and Alec kindly agreed to come on the podcast on his next London visit.
Full disclosure: Orbis is a client of Behind the Balance Sheet.
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