21 | Matthew Ruber, Melding the Quantitative and the Qualitative

My guest today is Matthew Ruber. Matthew is the founder Enlihtan Capital Management. At Enlihtan, Matthew employs a research-intensive “bottom-up” selection process, in order to find excellent businesses at prices that represent excellent business sense. Before Enlihtan, Matthew was a senior trader with Macquarie Bank in Australia and Hong Kong. And then successfully ran a multi-strategy proprietary trading business for CLSA in Hong Kong, focusing on merger arbitrage, volatility trading and value-based special situations. 

In this conversation, we cover how he melds Quantitative and Qualitative characteristics when finding investments, asking the right questions of your investments, and some stories and lessons from AGM’s.

Super fun and varied one today, I know I learned a tonne so I hope you do to. So please enjoy my conversation with Matthew Ruber.

Show Notes:

[00:00:45] – [First question] – Most surprising thing about running your own fund?
[00:05:10] – Matthew’s quant background
[00:08:06] – What led Matthew to qualitative investing?
[00:11:24] – Matthew’s scorecard changes
[00:14:04] – Do you push back against a scorecard?
[00:16:08] – Lessons from AGM’s
[00:22:36] – Why move from Quantitative to Qualitative?
[00:24:26] – Approaching volatility after being a quant
[00:29:02] – Any aspects of investing that come easily to Matthew?
[00:33:20] – Why start your own fund?
[00:41:31] – Life outside investing?
[00:43:01] – Most undervalued life experience?
[00:44:56] – Influential books or resources?

Connect with Matthew:

Listen to this episode on Apple PodcastsSpotifyStitcherCastboxGoogle Podcasts, or on your favourite podcast platform.


Kalani Scarrott (00:45): Alrighty. My guest today is Matthew Ruber. Matthew is the founder of Enlihtan Capital Management, where he employs a research intensive, bottom up selection process in order to find excellent businesses at prices, which represent excellent business sense. Before Enlihtan, Matthew was a senior trader and Macquarie, in Australia and in Hong Kong, and then successfully ran a multi-strategy prop trading business for CLSA focusing on merger, arbitrage, volatility trading, and Value based special situations. In today’s conversation, we cover how he melds qualitative and quantitative characteristics when finding investments, asking the right questions of your investments and some stories and lessons from AGM’s and management. So it was a super fun and varied one today. And I know I learned a ton, so I hope you do too. So please enjoy my conversation with Matthew Ruber.

Cool so, Matthew, thank you so much for being here today, but maybe a fun one to start before we get into you and your background and your work, what’s most surprised you about running your own fund? Like what do you think is an underrated or underappreciated aspect of your role?

Matthew Ruber (01:44): Well, I think probably the fact that there are just so many research rabbit holes, you can go down. You simply have to prioritize how to best allocate the only true scarce resource, which is always time. So in the end, the only thing that makes, the only thing that matters, you know, so I suppose what I’ve, what I’ve tried to do is prioritize time by using techniques like Covey’s time matrix, that sort of thing, where you try and get away from the urgent, but unimportant stuff, and try to emphasize things which are much more longer term. But, and of long-term strategic importance, but certainly not urgent. So that I would say is probably the single biggest thing. Just the amount of the time you can waste just chasing unnecessary sort of leads. But I suppose an underappreciated aspect of it would be just the sheer amount of time it takes to get from, you know, an inception of some investment idea to an actionable purchase.

Um, you know, it can take six weeks. I mean, if the company or industry is something unfamiliar to you, it’s a very long journey and what’s even worse about that is it can actually come to naught in the end. Um,and that can happen for lots of reasons. I mean, maybe the stock runs up while you’re doing the research, or maybe you discover something very negative only very late in the process. It can be frustrating to spend so much time on something with no tangible benefit. Um, but this is the nature of running a high conviction portfolio.

Kalani Scarrott (03:13): Yes. How do you get past that? Is it just knowing that in the long run it’ll play out or does frustration ever get the better of you? Like how do you deal with it?

Matthew Ruber (03:20): I think this is probably the single source of productivity gain I can get to. I mean, this is really, this really addresses the research productivity issue and it’s not enough to do efficient research. You’ve got to get to research that leads to actionable buying ideas. You’ve got to get to a transaction. And it’s frustrating because you know that you can’t get to a transaction unless you do the homework. There’s no easy answer to this. Um, but for lots of reasons what I’m trying to do, we can go into aspects of this as, as we get into, as we get into this, this chat. But, I am trying to automate aspects of this because it’s just, it’s an endless frustration, endless frustration.

Kalani Scarrott (04:03): Yeah. So we may as well continue on. What can you automate? What are you looking to automate and how do you go about it?

Matthew Ruber (04:07): I think, a lot of it comes down to, uh, well talking about the investment process, I suppose a little bit, but, a lot of my investment process, which has developed over a very, very long timeframe now, but, um, a lot of it lends itself, I think, to breaking down all of the big decisions into smaller chunks. And I’m a big fan of scorecards. So what I’ve decided to do is, over a long period of time, try and remove some of these sort of biases, by breaking all the big questions out into lots of little questions, figuring out waiting schemers, and trying to assign some sort of quantitative metrics to them all. It’s easier said than done, because a lot of this stuff is quite qualitative, and you know, a lot, I think the progress will really come from finding quantitative, analogs to qualitative questions. That’s where the progress will come from. And I’m always sort of heading in that direction, but it’s, very difficult. You can sometimes get a lot of false precision in this sort of business. You think you’re, measuring something, but you’re not really measuring it. I mean, it’s really a false metric. Just because there’s a piece of data, doesn’t mean there’s an insight.

Kalani Scarrott (05:23): And you’ve brought up qualitative and quantitative. I’d love to talk more about your background and cause it’s a bit different and you’ve gone from prop trading, I think, to where you are now. I’d love to hear more about how you’ve gone about it, what you’ve learned along the way and just walk me through it, I guess.

Matthew Ruber (05:37): Yeah. So look, I studied lots of mathematical finance at uni and loved all that stuff. So I naturally sought out a role that did something with all of that learning. And I got a job in, as a Derivatives Trader at Macquarie Bank, straight out of uni. And so that was great. Lots of fun. I mean, you know, lots of opportunities to apply, you know, quantitative techniques to arcane sections of the market. I mean, it was great. But in terms of the investing process, so, investing money less about sort of market making or arbitrage or any of those sorts of things actually attempting to make an investment decision. I mean, I think that all of those skills that I learned at uni were great, and some of them are, you know, some of them, I continue to use now, but I did suffer from a man with a hammer syndrome.

You know, the, the old saying that, you know, to a man with the hammer, everything is a nail. And so the issue with that is that you’ve got this lens where you’re, every time you’re looking at an investment proposition, you’re trying to put it through this sort of quantitative lens and that doesn’t always work. It helps, so you can do lots of clever things with quantitative techniques. You can apply lots of screens, that sort of thing. You can filter the universe of possible ideas down into, you know, attractable, subset, that sort of thing. But what I’ve found that the turning point for me with all of this was, getting more involved with the readings of Warren Buffet. And I knew about Buffett. I mean, I was following Buffett for years, but from a context of, cause Buffett was actually, in his settlement days and pre-settlement days and post-settlement days doing a fair bit of arbitrage himself, um, used to play around in convertible bond up.

And that was like a cornerstone of the things that we did at Macquarie Banks. I was just naturally interested in smart players, like that and what they were doing, but I had no idea what he was in terms of the long of an investor. I’d never read any of his manual letters or any of that sort of stuff. But in 1997, I got around to doing that and I read every single letter of slavishly and developed an investment process around that, based on that. And that’s, that was great. That was profoundly qualitative. So I’ve kind of, I kind of had this huge shift away from like a quantitative mindset to a much more qualitative process. And now I’m almost going full circle, cause I’m sort of turning back towards more of a quantitative attempt at the qualitative. But maybe that’s just the order things have to happen in,

Kalani Scarrott (08:19): Oh, that’s a great journey, but I’d love to know just like what lead you to Buffett? Like, was there always that qualitative itch? Did you always want to sort of understand businesses better?

Matthew Ruber (08:27): No. No. So what happened was around the 1997 timeframe, a colleague of mine gave me Roger Lowenstein’s, book, The Making of an American Capitalist. I read it and I thought, this is very interesting. This guy’s got their hands on a lot of interesting ideas and just the whole approach and the references to, you know, Ben Graham, all this sort of thing. And so I read the Ben Graham Intelligent Investor book, and then I read every single Buffett letter that was ever written and a whole bunch of other books about Buffett. And you know, that whole sort of era, and also the people that Buffett himself recommended that you read, which are people like Philip Fisher’s book, Common Stocks and Uncommon Profits, and read all of that and, and just refine my investment process around that, which, and it’s interesting to look at that, that’s quite a journey as well, because, you know, I remember just thinking, okay, look, you know, can we take some of these ideas?

There’s lots of ideas. I mean, there’s lots of lessons. There’s lots of things Buffet did over the years and there’s lots of principles and I stress principles, you know, they’re things that are fairly invariant, but they’re difficult to translate into hard and fast rules, in every single instance. So I built essentially, a very detailed model, a spreadsheet model, which kind of looked at all these principles and gave them primitive sort of, you know, weights and, or at least forced me to ask and answer the questions systematically before making any investment. That was kind of the first iteration of all of this. That was version one. And I’m now up to version 45 of that model. And I only, have a version change when I roll up several changes. So there’s been a heck of a lot of iterations.

Um, but it’s become a lot more sort of, as I said earlier, a little more scorecard oriented, because I think one of the problems that I discovered, one of the big problems was that you can ask all the qualitative questions you like, but if you’re going to answer them through a lens, which has you seeking the very, the very thing you want, ie, confirmation bias, then you’re really not, you’re not being honest, intellectually honest with yourself, even though you think you are. In fact, even the mere act of asking the question, knowing that you’d like to actually do something with this company, you do actually want to buy it, otherwise you wouldn’t be looking at it in the first place. So then to ask a series of questions with that already in your head is going to lead to bias.

And so that was the scorecard approach, because that way, I sort of formed a scorecard and I’ve got all these weights, but I hide the weights. So I, actually built the thing, and then I’ve, like hidden the weights, I don’t even remember now how I’ve actually weighted those questions. And I do that deliberately because I don’t want to gain myself. I mean, I tend to go through these questions and, you know, the questions and you think, well I’m just going to answer the questions in the way that actually gets me to the state where I get a score where I can buy the stock. I mean it’s an inherent problem, you know? So I think, anything that you can do to remove these biases is a good thing.

Kalani Scarrott (11:36): Yeah. And if I’m allowed to ask, or am I allowed to know, like, what have been the biggest changes over your scorecard from version one to 45? Like what have been the biggest things that have moved?

Matthew Ruber (11:45): I think the biggest thing, probably. So initially there were just a few questions. In fact, that was the whole point of this. The whole point of this was not to have question inflation. It was to basically just distill the investing process down to just a few actionable elements and not complicate stuff and just try and distill it. You know, what is the essence of what you want to buy and why you’re buying it? And what price you’re buying it. And that’s it. What I’ve found though, is that if you asked very high level questions, like, you know, things like, well, does it have a moat? Or something like that. I mean, that’s a very broad question. Well, you know, you can make up almost any answer you like to that. It’s one of these sort of wooly questions, which unless you sort of go a lot further with it, I just don’t know how you can action something on the basis of that, asking and answering that specific question. I mean, you’ve got to identify the nature of the moat. Is that really a moat? What is the intertemporal nature of this moat? Is it going to be stable over time? Can we even answer that question?

So what I found was that I had to break the questions down into smaller bits, and then I would give each bit a weight. And each bit of that weight might actually, in some way, contribute to the overall mass of the question, but I also have to stop myself from gaming myself in this process by knowing the weights and therefore actually undermining myself in my selection process. There’s probably lots of other ways to do this. Look, I mean, that’s another broader question that I’m thinking about at the moment actually, like, are there, so I’ve got this score card approach, which I think is a reasonable way to approach the problem.

And it has worked pretty well actually, but it’s kept me out of a lot of problems situations, And it’s also, caused me to, to own something for a long time and ultimately sell it on the back of some subtle changing factors as part of the overall scoring mechanism, which I can’t actually point to which factor it was, because I’m not looking at those weights, having already formed the weights in the past. But I know that basically, you know, the situation is clearly deteriorating and that’s something I might not have seen otherwise I might’ve just sort of, swept it under the carpet in the past year and said, you know, yeah, the overall it’s still pretty good, let’s just hang on to this. But I think it helps me guard against thesis drift a little bit. Which is a good thing.

Kalani Scarrott (14:17): Yeah, so how much do you push it back against the scorecard? Like how much are you willing to put your foot down or go with gut instincts or is it live wild scorecard, die by the scorecard?

Matthew Ruber (14:24): Never, no, no. I’ve decided that, look, every time I’ve done that I’ve lost money. So I just think, it’s better to be disciplined. Look, the cost of the discipline is that you will, you will, once in a while come across something that you’re, I’m going to use, the word I hate using, which is intuition, because intuition is really just a hidden algorithm that you don’t understand. Right? I mean, it’s just something going on in there, which may have validity or may not, but anyway, intuition. So once in a while, you’ll have intuition about something. And that’s something we’ll actually turn out to be correct, you know, and it won’t, it may never have basically passed your scorecard or any of your rigid metrics or any of that sort of stuff. Um, but that’s, I’m happy to pay, that cost of omission to get rid of the cost of commission. Which is to make extreme errors from intuition that just are ruinous and involve, capital wipeouts and all that sort of thing.

So it has kept me out of trouble. Look, I definitely won’t be able to buy, some assets, which are clearly going to be incredible performers. And, some things do get away from you because it could be just something as simple as it just doesn’t have enough seated history. I mean, this is a common problem for me because there is, there are qualitative and quantitative elements to my scorecard. And if I can’t get enough of both of those flowing through, particularly the quantitative, it’s never going to make the grade. It’s never going to get past the threshold. That’s always difficult with new businesses. It’s difficult with things that have just IPO’d out of nowhere. It’s difficult, for businesses where there’s been some major acquisition, it’s difficult for situations where there’s a spin off where the embedded history of the business wasn’t there previously. There’s lots of reasons for why it’s a problem. So it is an issue. Um, but it keeps me out of trouble.

Kalani Scarrott (16:21): Yeah, no, that’s great. And to move or to talk about management, maybe like I’ve heard you speak a bit about attending AGM’s abroad and even our connection who put us together today, originally meet you at a Berkshire meeting. So a massive thanks to him as well. But what do you think you could learn maybe from physically attending the company AGM or any specific examples where it’s helped you or helped maybe avoid situations? Like how do you view that?

Matthew Ruber (16:41): It’s always interesting. It’s always interesting. I mean, it’s full of what I call random edge networking. Anything can happen at those sorts of things. You meet lots of interesting people. Sometimes you’ll be seated right next to some profound insider in the company, you know, this sort of thing. There are lots of possibilities. Um, you get, I think an opportunity to see the whites of management eyes, so that’s helpful. I mean, there are other ways to sort of investigate culture and all that sort of thing. I’d say probably the number one difficulty for me and my investment approach is understanding a company’s culture. This is the hardest thing to distill because, you know, unless you’re actually working there, I mean how the hell do you really know what’s going on? You know, it is very difficult.

Um, and going to the AGM’s that helps. I mean, they’re obviously, you know, they can be very scripted events and, you know, the actual content may not be irrelevant at all, but you do get to speak to people. You do get to ask questions, that’s helpful. Um, you’d be surprised, you know, they go to some of these AGM’s and the behaviors are just so bad that you’d just think, well, I’m glad I came to this AGM because I’m certainly not investing in this company. There’s one particular actually that springs to mind one particular company. Um, there was a Hong Kong company, actually a group called Pico Far East. I don’t know if you’ve ever heard of them, but they are pretty much the leader in the exhibition design and services space. So what they do is all of those sort of very fancy, display booths and associated paraphernalia, all of their sort of premiums and all that sort of stuff that’s at any kind of massive trade exhibition of which there are just an astounding number of trade exhibitions globally each year.

These guys have a really big share of that marketplace, particularly in Asia-Pacific. And they’re the best. And so they’re an interesting company with a peculiar kind of a niche. And, I mean, lots of things have happened, you know, since I was looking at that company, but this was probably back in around the 2017 timeframe. Meeting was in Hong Kong and I thought, okay, I’m going to do quite a lot of work on this company. I’m going to go to the AGM. Um, there was an activist on the register he owned just over 5% of the company. And I wasn’t sure whether he’d be at the meeting or not. He was always sort of pressing them for some changes and various things. So, okay, let’s go to this meeting. And so the activist was there, and this guy is very smart guy, he is incredibly thorough, that does an enormous amount of work on the companies before we invest. So I figured he’d done a lot of the homework. I’d done a lot of work on it. I’d done weeks and weeks and weeks of work on it. And I went to the AGM and they see, and the chairman was totally evasive on all questioning, totally evasive. And the activist, this is the guy basically weighs more than 5% of your company. And he still, I mean, he just wouldn’t answer the questions or he would just obscure the answers and they’re pretty basic questions. It wasn’t anything particularly confronting, they were reasonable questions about, you know, shareholder dilution and, you know, all sorts of rights, that are peculiar to the Hong Kong market really. And then I asked, I decided, well, you know, look at, maybe it’s a bit confronting with the activist, so I’m going to ask him a more general open question about strategy. And I got shut down as well. Not totally directly at my face shut down, but enough to basically say, okay, well wonder she’s not going to answer this question basically. Yeah. And so at that point it’s pretty, uninvestible, isn’t it, I mean, it’s just difficult for me to get my head around a situation where the shareholders just don’t matter to the management. It’s a dangerous situation. If there are just better things to invest in out there, better stories, better governance, I didn’t invest.

Kalani Scarrott (20:37): Anything maybe on the flip side, where you’ve maybe, management have convinced you somehow or?

Matthew Ruber (20:41): Um, I think one company that was a lot like that actually, um, where I may have taken a lot longer to form a positive view on it and actually commit capital to it. But by going to the meeting, I mean, this is the precise opposite situation, right? The, CEO of this company, um, is a profound communicator and an educator, and wants to bring all the shareholder base along for the journey. And he’ll spend more than an hour actually up to two hours, think that meeting goes for just talking about every aspect of the portfolio of what’s going on in this business. This is a business that’s actually, you probably know it might do, you know, Markel Corporation?

Kalani Scarrott (21:23): Yeah. Yeah.

Matthew Ruber (21:24): So baby Berkshire Hathaway really, and they have modeled themselves on Berkshire Hathaway. They are in very similar business lines, um, just with a lot less scale. Uh, but you know, he takes great pains to explain what’s going on in the portfolio. They’ve, also attempted to buy more unlisted operating businesses these days, almost like any venture capital sort of operation and, um, private equity really. But there’s a lot to talk about in those businesses and they bring you along for the journey. Um, in fact, that’s a meeting that’s just needs to be attended by a lot of investors. I think it really is a lesson in how to run things properly.

Kalani Scarrott (22:06): And even, like you mentioned before, the optionality of meetings, I never even thought about it that way, but that’s such a great way of putting it, like the people you meet along the ways. Yeah. Or the insiders.

Matthew Ruber (22:15): It’s surprising. I mean, you know, and just not just that, but just also just other investors in the audience, you know, I mean, look, good management, attract good investors, attract other good investors. And so there’s a big network effect here. And you’re in the room with people who are, who have self-selected to be in that room. And they are naturally on the same wave length as you as possible, you’re going to be in a giant thought bubble. It is possible. Uh, but they are nonetheless generally pretty interesting people to talk to and you can learn a lot. And I have.

Kalani Scarrott (22:49): I’ve never thought about it that way, but that’s so such a good way of putting it. I love it. Um, so maybe when you made the move from more quantitative to qualitative, like, why make that jump? What made you like, walk me through that process? Why did you do it? What was it like? Yeah –

Matthew Ruber (23:04): So it was a slow moving process and I probably should have done it a lot earlier. Um, so I always thought so working for the banks doing arbitrage, um, doing lots of, and I’ve done lots of different, um, types of quantitative trading techniques in these institutions. Um, so-called, multi-strategy hedge fund techniques, really, um, everything from the derivatives, arb, stuff, the option to arbitrage convertible bond arbitrage, you know, risk arbitrage or the merger stuff, um, to, you know, statistical pairs trading, all sorts of things. We’ve covered a lot of stuff over the years. Um, all of it interesting. Um, but in the end I concluded it’s, it’s picking pennies up in front of steamrollers. I mean, this is the problem, and you are working for relatively small, but fairly certain returns, probabilistically, predictable returns. Um, they’re fairly high frequency, which is great, but in the end, I mean, what you’re not getting is these longterm compounding things. And it’s better to be in the long-term compounders. It’s just an easier way to make money. So, I’m going to describe broadly my time doing all that sort of stuff was a lot of fun and very intellectually satisfying. But I think in the end it was a bit of an intellectual indulgence. And I think it probably would have paid me to just think about, you know, these longer-term sources of compounding gain a lot earlier in my life.

Kalani Scarrott (24:40): So then how did you approach maybe volatility and the risk? Yousaid, ‘pennies in front of a steamroller’, like going to longer-term holdings. How do you handle it?

Matthew Ruber (24:48): This is I think, another one of the famous sort of mental model discussions, isn’t it? Um, so I think what you have to do, is you need to have, um, a decision-making framework, which is uncorrelated with the thing that you’re actually deciding. That’s the key to this. I mean, you’ve got to do that at some level, so to put it into concrete terms. So I think you come from a background where you were doing a little bit of momentum trading, this sort of thing, right?

Kalani Scarrott (25:16): Yeah, exactly.

Matthew Ruber (25:17): It’s essentially a function of the market itself, right. I mean, the thing that you’re actually actioning, uh, and all the data to support that decision is itself, the market more or less, right. There’s a strong feedback connection between the two. I mean, sometimes people will be doing momentum of earnings, momentum of this momentum of that.

Um, but in the end, I mean, like in particularly a lot of technical trading systems, obviously, perhaps a better example really, but those things are obviously, um, a function of market price level themselves. So what I’ve tried to do is find a decision-making framework, which is uncorrelated with the market. And then, I mean, nothing’s ever totally uncorrelated, everything’s correlated at some level because at the end of the day, we’re sitting on this, this planet and everything on the planet is fundamentally correlated at some level. Right. But, for the most part in financial markets, I mean, if you can actually arrive at a decision-making engine, which isn’t actually the market price itself and the market price is not a direct input into that engine, then I think that you can make the decisions irrespective of where the market price actually is.

And the market price then becomes an opportunity. Volatility becomes an opportunity rather than a risk factor. So I don’t see volatility as a proper surrogate for risk. In fact, it’s the wrong maybe that’s the wrong way to describe it because in the end volatility of price, I don’t see as a surrogate for risk, but volatility of underlying company metrics, I would view as a surrogate for risk. And in fact, it’s one of the, it’s one of the elements of my screening system. It’s like, well, you know, if they’ve had volatile earnings history, but volatile earnings history may or may not correlate to volatile price history. It might, or it might not, you know, um, in any case, I mean, you know, I think that volatility is, is something which is, is a convenient measure for risk, but just because it’s convenient and available, it doesn’t mean you should use it.

Kalani Scarrott (27:16): If I’m allowed to ask any quirks of the scorecard that you think other, other people don’t look at, maybe?

Matthew Ruber (27:20): You know, I don’t think there’s anything that I’m doing that’s just totally unique and different. It’s an amalgam of what other are doing, because at the end of how many, how many original thoughts can anyone really have? I mean, we’re all an amalgam of every thought everyone’s ever had, right. Everything we’ve ever read, every, every conversation we’ve ever had. So in essence, I mean, it’s all just in the mix, isn’t it? It’s the recipe. So I think it’s less about the scorecard. Actually. I think the scorecard and or any, any decision-making framework you want to use, whatever your models using and all that sort of thing. I think they give you a disciplined framework to operate in, but there’s so much more than that. I mean, I think it’s really, um, I think it’s really about harnessing lots of other factors around how do you make decisions in extremely difficult circumstances? How do you actually rely, can you rely on this framework, this model, what ever you’re doing in circumstances of extreme market stress? That’s the big one, isn’t it? I mean, that’s the big one. I mean, how are you going to do it? I mean, you know, the market’s down and you’ve just dropped 50% of your money. Can you purchase more at that point?

Kalani Scarrott (28:31): Yeah. Yeah. Great way of putting it. And is it almost a bit of, sometimes you got to know the rules in order to know which rules to break or bend, you know what I mean?

Matthew Ruber (28:38): Yeah. I mean, I think, well, this is it. I mean, but I think it’s difficult. This gets to the heart of decision-making. So what is it to make a quality decision? How do you make a quality decision? Does it have to be completely rigid. Do you have to preform every possible factor that goes into that decision before you even get anywhere near the decision? Is it okay to bend the rules once in a while? Is it okay to, to occasionally look for exceptions? I suppose there’s always going to be some sort of exceptions. Um, but the more times you basically drift from your framework, the greater, the risk that you’re just going to drift into insanity.

Kalani Scarrott (29:15): Yeah. Great call. No arguments from me. Is there any aspects of investing and the way you do that you think are either pretty easy on come naturally to you? Like what, what might look very hard from those outside looking in that you enjoy doing do you reckon?

Matthew Ruber (29:27): Yeah, that’s an interesting question. Um, I mean, I think, um, it’s been said that the great investors have the three T’s as they say, time, training and temperament. Right? So I’m looking at the, at the, at the investments, which most people are pretty time poor. So that’s a difficult one in the first instance, then you need some training and you do need some basic financial training, if you’re going to do things like, look a company fundamentals, need to understand some accounting, whatever you’re doing, but then there’s the temperament, the temperament, the hard one, that’s the hardest of the three because, um, it’s hard to acquire it. And it’s, it’s I think in probably there are just some people that are hard-wired with the right temperament in the first place. So in my case, I mean, I definitely have a contrarian mindset by nature.

So I just naturally gravitate towards the opposite to what the consensus thinks or does. Um, that’s not to say the contrarianism is always right. I mean, being a contrarian just for being contrarian sake is absolutely not a bankable strategy in life. It just be involve lots of arguments probably, but you know, I think exceptional returns do require two things in the end. Right. You’ve got to have a different view. I mean, you’ve got to have a different view to the market and you’ve got to be right about that view. And there’s no point just having the same view as a market. I mean, otherwise you will just perform with market. Um, so I think a contrarian mindset, I mean, to put it in more precise sort of terminology, I mean, it’s, it’s being a contrarian I think is, is a necessary, but not a sufficient condition for investment outperformance. Simply because you’re going to have to do something different to the market in the first place to be different to the market and to beat the market in some fashion.

Um, and if you want to be a contrarian, I mean, I think you’ve got to prepare yourself to act in the face of completely unprecedented events and in the absence of perfect information. And it’s always like that, you know, I mean, it’s just difficult. There’s just this no circumstance, like all the great opportunities for investing money in markets occur, you know, in some time of stress and there will be maximum uncertainty. The markets always hate novelty. They hate novel events to the, well, I should say they react to novelty. So they react to novelty, disproportionately positive when it’s something good and disproportionately negatively when it’s something bad. And so things like the global pandemic, that’s a classic case of market novelty. Haven’t seen it before. Certainly haven’t seen it in modern market terms. The last time we saw anything like that was probably 1918, the Spanish flu, you know, so, and even then the markets were a fraction of the size they were, and it wasn’t as you know, there wasn’t the communication. Um, so that event, you know, I mean, that looks scary at the bottom. That very scary, I mean, and who would have predicted the events that occurred in the months after that?

Kalani Scarrott (32:24): I think it was Mike Tyson, he said, ‘everyone’s got a plan until they get punched in the face’. Can you even prepare, how do you prepare? Like-

Matthew Ruber (32:31): I look, I think the only way that I’ve found to do it, I mean, this is the issue, right? So you’ve got to get, um, you’ve got to develop a conviction in what you’re doing and an investment conviction, which is going to overwhelm your natural resistance and all your emotional fears at the, at the point of the decision-making. So that will be the great tests that will be the great opportunity. And the only way to pull the trigger at that point is to have the confidence in the decision because of all the work you’ve done in the past, or just the sheer amount of time you’ve been following the business, you know, and you’ve been looking at it for years and years and years, you almost have to basically go Kamikaze at that point, you have to say, well, you know what, I’m just going to invest because really if this fails and this doesn’t work, then nothing works and it’s all to zero anyway. So let’s just go for it. That’s the kind of Headspace you’ve got to get yourself into. It’s never comfortable at the bottom. It’s just not comfortable. And if it is comfortable, it means it’s not the bottom.

Kalani Scarrott (33:35): Yeah, that’s great. I love it. I just love this. This is so good. Um, maybe start talking about how you started Enlihtan and why you decided to go out by yourself, like, just walk me through that whole process. What was it like? Your thinking through it, like, yeah, I just love to hear the background, the story behind it.

Matthew Ruber (33:51): So the roles that I had at the financial institutions and probably especially CLSA, that one, that was a very outsider kind of role anyway. So the team that I was running at the time was very much an outsider looking in, and that was, that was the era after I’d already discovered Buffet. So what was going on with me was, so we were running these, these sort of internal hedge fund at CLSA, if you like, um, and doing all the trends, all those sort of, you know, classic sort of hedge fund sort of things, all the arbitrage strategies. And that was my day job, but my night job would be to invest my own money, according to these sort of Buffettesque sort of principles. Right. Um, and that went on and on for years, you know, so day job and night job.

And then eventually I just got to a point and there’s natural exit point at CLSA anyway, but I got to a point where you know, I decided, look, you know, if I’ve got, if I’ve got some capital and I’ve got a plan for how to run that capital, well, then I might as well just run the capital and open it up to some external investors because that’s what I’m going to do anyway. So why not? And so I started the fund, and I think that it would be, it was definitely tempting just to just say, okay, I’m just going to run it like a private family office here and just, you know run my own money and just not have any external investors, but there’s some value in having external investors, you know, external investors basically give you a level of accountability and rigor that you wouldn’t get otherwise.

I mean, I think that the process of, you know, for example, writing a quarterly letter, enforces a clarity of thinking and a need to justify actions or a lack of actions. It’s something that I have to sit down and write and writing brings great clarity to thinking. So, although it seems like a bit of a pain to have to do all those sorts of things and there’s compliance and there’s other things happening. Um, I think having sort of the Merry band of followers there, knowing that they’re there and knowing that you need to write to them once a quarter is a valuable process.

Kalani Scarrott (35:57): Yeah, totally agree. And is there anything you wish you knew earlier or wish you learned earlier? Like what advice would you give to someone starting their own fund? I guess, maybe.

Matthew Ruber (36:04): Probably the number one thing would be not to not to view the funds management business as a means to an end. Um, I think that’s, I mean plenty do mind you and plenty are successful, right? So I’m not saying that this is going to be a doomed strategy if you go down that path. But, um, I just think there are, there are essentially two ways to go here, right? You can start a business, a funds management business with the idea of getting a big business, which means you might do lots of things like sell lots of strategies that are in Vogue. In fact, you would design strategies for sale. You’d be like a consumer products company, you’d say, well, here’s my funds management business. I’ll treat everyone fairly and equitably, but at the end of the day, I’m going to run the products I think sell and sell means, raise lots of money and get lots of fees, right.

Or you can say, I’m not going to do that. I’m going to run a fund. And the funds management business is there, but it’s not the most important aspect of this. All of the primary effort is on actually running the fund. Right. Um, that’s my approach now, in reality, um, any of these businesses are a blend of the two, there has to be a blend of something. You can’t run the fund without running the business. I mean, you can’t be completely, you know lax on one versus the other. So there’s always a blend, but I think that I definitely fall into let’s run the fund for the fund’s sake. And that’s because I’m the biggest investor in the fund. I think that it would, I suppose my advice would be, look, don’t be tempted to maximize your own circumstances at the expense of your investors. I mean, I think that’s the issue of sort of, if you focus first on the business, you’ll be tempted to go down that sort of a path. So I view it more as a way of life, a partnership with the investors and thus the sort of the focus on running the fund, which is really just an extension of running my own money. Really.

Kalani Scarrott (37:53): Yeah fair call, totally agree. Probably a common complaint with people running their own fund, I think I hear a lot is they didn’t realize how much business side of it versus the investing. Like, how do you view that?

Matthew Ruber (38:01): Well, I am the virtual fund here. I mean, I really am, and I’ve outsourced, I’ve outsourced everything. I’ve got service level agreements with everybody. You know, I don’t, I’ve tried to automate as much of it as I can. I keep it very lean and mean. I don’t spend, like there is, there’s definitely a steadily growing compliance load and that’s just throughout the entire financial services sector. I mean, every time there’s one bad actor somewhere, it just adds a new layer of regulation everywhere. It’s a pain right. Now we’ve got, you know, in the time that I’ve started this fund, we’ve gone from, you know, some simple sort of, you know, withholding sort of forms, you know, once a year, every couple of years or whatever. Now you’ve got FATCA, you’ve got CRS, you’ve got all this, know your client, all this due diligence stuff.

I mean, the amount of effort to onboard somebody in a financial institution now is just ridiculous. You know, but it’s just the world we’re in. So there’s a little bit of action there, but I don’t have an enormous number of investors. They are large and concentrated. They’re all very, you know, they’re all very sophisticated. I mean, they rarely, if ever pick up the phone and call me about the fund or any of this sort of stuff, um, you know, it’s a pretty easy thing to manage if you have the right clientele in the first place. So this is the other problem. I mean, and this would be true. I think that, I suppose that’s another aspect of like, you know, starting any business, but certainly, you know, starting a fund. I mean, if you have difficult clients, you will have a very difficult life running a fund. I mean, you know, lots of clients phoning up complaining every time the market goes down 10%, this sort of thing that, that just doesn’t happen with in my case. I mean, I write to them quarterly. I’m very forthright about what’s going on. They know what’s in the portfolio. It’s all very clear. I think people appreciate that level of clarity.

Kalani Scarrott (39:55): Has that been a deliberate action since the start? Or has it been happy accident? Like, and how do you achieve that?

Matthew Ruber (39:59): No, I started out that way. One of the, um, so one of the biggest fears I had actually before I started this business was just the fact that having difficult investors, I mean, having investors, just, you know, phoning you up every time something goes wrong, or the markets are a bit volatile, certainly if they go down 30 or 40%, you know, I mean, they’d just be in this great panic and just want to withdraw their money, that sort of thing. Um, and that’s not, that’s not what they’re signing up for. I mean, I, I’ve certainly gone to great lengths to explain the investment process and why it’s a longterm process and what should be expected from that process. And that seems to have worked pretty well. I think it is difficult basically to attract the right sort of client base in the first place.

So, part of the conceptual problem in all of this, which is kind of this is the cynic in me. If you spend enough time with the finance industry, you become profoundly cynical. The issue for all fund managers is that you’re fundamentally trying to do something in the marketplace, which exploits some sort of psychological anomaly, right? That investors are buying things at the wrong price and that there are a bunch of irrational people. And you’re the only rational guy in the room. That’s the fundamental premise for why you would enter a marketplace, right? Otherwise if everyone’s rational, what’s the point. So you think everyone else is irrational, but unfortunately the same people that are, that you’re engaging with in the broader marketplace are also your potential investors. So what you really want is hyper rational investors and extremely irrational marketplace. And that’s a difficult combination to get.

Kalani Scarrott (41:45): I’m going to ask, like, what do you do? Do you have any favorite things to do outside investing? Do you ever switch off? Because like, yeah, you just seem so into it. I’m just curious.

Matthew Ruber (41:53): Yeah, I do. Um, I have, uh, what I’d say, four quadrants of activity, right? There’s this kind of my big plan going forward. This is my, my feeble attempt at work-life balance here. Right. Which everyone seeks, but never seems to get to. And I’ve got to say it’s harder than even when you can articulate it. It’s still pretty hard to actually do it. Uh, so I’ve got the, I’ve got the finance stuff, which is the funds management, and these are my four quadrants. I’ve got the finance stuff, I’ve got math. So I do quite, I still mess around with quite a lot of mathematics and I’ve got some computer science stuff that I’m doing and I’ve got philosophy and all four of those interact in various interesting ways, mostly not at the same time, but also in unusual ways from time to time. And sometimes one is an enabler of the other. So those are, those are my big four quadrants. And I spend almost all of my time in one of those, um, and the best days of such situations where I’m probably in two of those quadrants, which probably gives me the greatest satisfaction. Outside of that, though I’m very into sci-fi and movies and all that sort of thing. Um, quality wines, life’s too short for cheap wine. Um, yeah.

Kalani Scarrott (43:07): No, that’s perfect mate. Just making sure you’re still human cause like this whole conversation like man, you’re a machine, this is unreal.

Matthew Ruber (43:13): And not at all.

Kalani Scarrott (43:13): Maybe moving into my closing round of questions and just some broad general, like, what do you think is the most undervalued life experience that university age students don’t give weight to? Like what’s an underrated skill or experience that you think they should have?

Matthew Ruber (43:25): I think I’d say their ability to present well-reasoned arguments, especially in a public setting. So in short public speaking, I suppose, um, it is underrated. I mean, and it’s probably increasingly underrated because of the presence of, you know, lots of personalized media channel and all this sort of thing, and your ability to sort of get on a one to many platform sort of environment and just deliver your message to the world. But the ability to actually communicate to an audience live or semi live, I think is, is very underrated and not taught anywhere really. Is it?

Kalani Scarrott (44:03): Yeah. So how do you think someone learns, like how have you learned? Because you’re a great, great speaker. I thought, so.

Matthew Ruber (44:08): I got to say that one of my great ambitions is to be able to do that sort of thing and not be nervous about it. It’s one thing to do it. It’s another thing to be doing it with having knots in your stomach. And I think it’s, I don’t know why it needs to be like that. It’s an interesting conundrum, isn’t it? Because you get up in front of an audience and the audience actually wants you to do well. There is no circumstance where the audience does not want you to do well, because if you do poorly up there, you actually make them feel very uncomfortable. They’re probably more uncomfortable than you are if you perform poorly. So nobody wants you to perform poorly and yet, you know, you get up there and it’s actually nerve wracking. So it’d be great to somehow diffuse that. I just don’t know how to do,

Kalani Scarrott (44:49): If it makes you feel any better, I’m 20 podcasts in, and I still get sick before every podcast episode. I don’t know why, no matter how much research I do.

Matthew Ruber (44:56): Blame your biological programming.

Kalani Scarrott (44:59): Yeah, I will. For sure. Because yeah, it’s just one of those things you just maybe to learn to live with it, I guess, because yeah, for me, it certainly hasn’t gotten any better and no matter what I do beforehand.

Matthew Ruber (45:07): Yes, well, it’s a work in progress, I guess.

Kalani Scarrott (45:09): Maybe just in terms of informational sources for you, we’ve spoken about some of the books you’ve read investing wise. Has there been anything else that have been maybe influential in shaping your worldview or anything else that you’d really recommend?

Matthew Ruber (45:05): Well, I think that from a very young age, so I had a fascination,probably a bit of an unnatural fascination from like pre-teen sort of era, with the oddities of things, particularly things to do with space, relativity and quantum physics before I even knew what that really was, but just some of those ideas without understanding any of the, you know, the math behind it or any of that sort of stuff. But I was introduced to the ideas fairly early through books. And I just found that totally weird. I mean, just the implications for what it means for the reality we find ourselves in. So that has definitely transformed my worldview. Reality is a very weird place that we only have a very limited view of it, but look more generally.I would say that, you know, reading all of the philosophy realm, so, you know what I mean, reading, reading sort of the great sort of, um, you know, the great philosophical ideas from past theories.

So, you know, things like, um, you know, the Greeks, um, maybe the Stoics, this sort of thing, um, you know, there’s a fountain of information there from those, from those different areas. All of those things have had a big influence on the way I think, I mean, at the end of the day, you know, as I sort of hinted at earlier, I mean, how many original ideas can you really have? Is there any question that any of us can ask in this era that has not been asked at some point in all the history of humanity? And thus probably answered maybe not to your liking, but it has been attempted, you know, so you can go back and look at some of that stuff. It’s all there we’ve been around for a long time.

Kalani Scarrott (46:45): That’s such a great way to wrap up. And honestly, I’m going to be thinking about this conversation for ages. So Matthew, thank you so much today, it’s obviously late for you as well. So thank you so much.

Matthew Ruber (46:53): Yeah, you’ve been a great pleasure. Thank you for having me on,

Kalani Scarrott (46:56): Anything you want to plug or anything, or we can be, we’ll find you.

Matthew Ruber (46:59): Well, I’ve got my website www.enlihtan.com, which is a very unconventional spelling of Enlihtan, E N L I H T A N. That’s actually the 14th century French spelling. That’s how difficult it was to get the .com even back in 2010. So my quarterly letters are up there. If you want to subscribe to those by all means. I mean, yeah, that that’s open to everybody, not just my investors.

Kalani Scarrott (47:25): Perfect. Thank you so much, Matthew. I’m going to be thinking about this conversation for a while, so thank you so much.

Matthew Ruber (45:05): Thanks Kalani. I had a blast.