James Fletcher (02:48):

So then your question is always when to launch and what time and what conditions to launch it right. Right now we’re at a unique turning point where ESG and sustainable investing and quality investing are on the demands of global allocators. So just a couple of facts.

James Fletcher (03:09):

So Deloitte did a study that they estimate by 2025 that ESG and sustainability-linked assets will be half of global asset allocation. So over $50 trillion in assets. Every allocator in the world is saying, “Okay. My clients are asking for more sustainable, more ESG-integrated products, but will I have to sacrifice returns?”

James Fletcher (03:38):

We have a process that we’ve developed over really my 17-year career of doing deep analysis on companies, integrating quality and ESG into the process. Then, second, engaging with companies to help them improve their ESG scores and their ESG metrics and their company cultures. We’ve generated alpha and outperformance for it.

James Fletcher (04:03):

So I mean I had two groups that came to me and said, “James, have you thought about launching with all of the demand that we’re hearing for a strategy like yours?” That led me to feel that now is the right time.

James Fletcher (04:19):

We’re going to launch in the first quarter of 2022 Ethos Investment Management. We have over $100 million of committed investors, some amazing anchor investors, and a lot of demand in a product like mine.

James Fletcher (04:35):

Then for me personally, it’s building that legacy that great returns in the market can be generated through investing in good businesses. So good management teams of products that do good for society and really proving that this can be done in emerging markets, just like it can work in US and developed markets.

James Fletcher (04:56):

Then one of my personal goals, and we were building this at APG and we were building this at some of my previous funds, is that when you look in the shareholder list and you see that Ethos Investment Management is a shareholder of the company, that that means something, that that’s brand of quality, that this is a best in class business of treatment of employees, treatment of shareholders, treatment of their products doing good for society. So I really want to create a legacy that creates that brand around great businesses doing good for society.

Clay Finck (05:31):

Very cool. You mentioned the ESG and sustainability side, and we’re going to dig into that a bit later in our conversation. I’m curious, is your firm investing differently than the fund you were managing at APG? If so, how?

James Fletcher (05:46):

It’ll be very similar to APG. So the portfolio that I ran at APG was small/mid-cap companies in emerging markets. This is very similar to how I invested at Kayne Anderson Rudnick and how I invested at Westwood Global Investments. We take a concentrated portfolio approach to investing where it’s our highest quality 30 to 40 stocks within the investment universe, and we take a long-term approach to investing. So five years-plus investment horizon. Many of the companies in the portfolio I’ve owned for over 10 years.

James Fletcher (06:25):

We’re really taking a business owner’s approach where we’re not speculating based on a one-year cycle. We’re owning businesses for the long run, just like some of my great mentors of Buffett and Peter Lynch and some of the great investors, really take that business owner’s approach.

James Fletcher (06:43):

The opportunity set is very similar to how the portfolio, how I’ve invested in the past, which is we’re bullish about emerging markets. We think there’s long-term structural growth in countries that are developing. We see a lot of innovation and access to capital in emerging markets.

James Fletcher (07:01):

I mean just so you have an idea, there have been more unicorns created in China over the past 10 years than have been created in the US. The brand value of the top hundred brands in the world, the highest growth has been from China rather than the US.

James Fletcher (07:18):

So we see a lot of really positive trends of rising innovation, rising middle class. We focus on sectors of consumer healthcare, internet, and IT, what we define as structural growth sectors. The number of companies in emerging markets over the past 10 years in these sectors of structural growth sectors is up more than 4X, $500 million market cap companies and above.

James Fletcher (07:48):

That’s much different than developed markets, where the average number of listings on NASDAQ and US indices are in decline. So less companies are going public. So in emerging markets, you’re seeing a lot of new companies go public, a lot of companies emerging as large enough to be investable.

James Fletcher (08:07):

Then to your question of how it may be different than we’ve invested in the past, I think the portfolio and the philosophy is very, very similar. The main difference today is the alignment. So now I have a company that I own. It’s independently owned by me and the employees. So there’s a lot of alignment that clients like in boutique asset managers. I’m investing more than half of my personal net worth in the fund alongside clients.

James Fletcher (08:38):

So I’d say that’s the main difference from in the past is that now there’s that solid alignment with my assets invested alongside clients and independently owned. So we’re hungry, we’re excited, we’re aligned. We’re excited about the opportunity set in emerging markets, especially small cap feels very inefficient in the market set today. You’re getting some great businesses at discounts to what they would trade in developed markets.

Clay Finck (09:10):

Seeing that skin in the game and those incentives aligned are something that’s very good to see as an investor. Now on the ESG side, could you briefly explain what ESG investing is and why it’s important to you?

James Fletcher (09:25):

ESG, for the listeners that are not aware, ESG stands for environmental, social, and governance. Sometimes it’s referred to as sustainability investing or folk [inaudible 00:09:37]. Impact as well is a term that’s thrown around a lot.

James Fletcher (09:40):

So part of the problem in ESG investing is that there’s lots of different definitions of ESG. Most investors would say certainly that they have an eye to governance, that they spend a lot of time on the governance of the business. A lot of these factors are already integrated into the process.

James Fletcher (10:01):

I think what we’re seeing, though, in the past couple of years is a rising awareness for social factors, arising awareness for company cultures, arising awareness for carbon footprint and environmental sustainability and society impact of the long-term business model. When you think about it from a fundamental investor perspective, our goal is to maximize returns and lower risks over the long run.

James Fletcher (10:31):

What ESG integration done properly into the investment process is another tool in the toolkit to analyze risk, analyze long-term sustainability of the business. And we find it to be incredibly helpful.

James Fletcher (10:46):

We also find that the face value ESG ratings of a lot of the ESG ratings are really lacking in the amount of detail, the amount of understanding that they go into. So we think it takes a concentrated, fundamental, robust analysis of the business rather than checking the box whether they have a couple policies or what the carbon footprint is, and then giving a rating.

James Fletcher (11:14):

I mean just so you’re aware, Tesla’s ESG ratings vary widely by who’s rating them. Some may rate them as an A because it’s electric vehicles. Other may rate them an F because governance is bad and they use lithium for mining.

James Fletcher (11:31):

And so, ESG ratings vary dramatically. I think what we’re saying is to do it properly, you need a robust analysis, understanding of the business. I mean it takes us two to three months of due diligence before investing in the stock.

James Fletcher (11:46):

So it’s deep due diligence, background checks, management, understanding, interviewing employees, interviewing competitors. That type of work to really understand the ESG and the quality and the industry structure of a business can’t be done by checking a couple boxes of whether they have policies.

James Fletcher (12:08):

So to give you an example, maybe it’s helpful for your listeners, so one of the companies we invested in is a Russian company called HeadHunter.com. HeadHunter is the largest job portal in Russia.

James Fletcher (12:21):

One of the ways that we go about finding businesses is we find business models that we like, that are proven business models in developed markets and other markets around emerging markets. Basically we fish where the fish are. We fish where the quality businesses, the proven businesses that have been shown to demonstrate high returns on capital long-term compounding potential. We’ve honed that down to about 40 to 50 business models that are proven to very high quality, high barriers to entry, long-term compounders.

James Fletcher (12:59):

So one of those business models is online job portals. It tends to be a network effect business. The more users that are on the platform, the more employers are on the platform, the more that network effect builds. It tends to be winner-take-most economics.

James Fletcher (13:15):

And so, HeadHunter.com is the market leader in Russia. So they have 55% market share, three times more monthly visitors than the number two and number three combined, two times more CV database in a market where online recruitment is underpenetrated and is growing substantially.

James Fletcher (13:35):

So online recruitment is currently only 29% of total online recruitment budget compared to other even emerging markets at 40%, 50%. Then when we were doing research on HeadHunter, one of the things that stood out is they were massively undercharging their customers. So their average posting was $385 compared to China averages, which are $1100, India at $1500, and European and US standards at $3,000 to $4,000 a job posting.

James Fletcher (14:10):

So they were giving companies 10,000 job postings a year and only charging them $250,000, meaning that they were massively undermonetizing their business. When we went in and did our digging and due diligence …

James Fletcher (14:28):

So Russia, to your question, Russia is a country where you need to be very aware of state links, of regulatory risks, of sanction risks, of the management team. And so, here the ESG scorecard, the management analysis plays a big role.

James Fletcher (14:48):

So in HeadHunter.com’s case, the management team was phenomenal. So Mikhail Zhukov is the CEO. We spoke to him many times and we also spoke to industry peers. So we spoke to a leading job portal in the US and Australia and India. They all knew Mikhail. They all knew HeadHunter.com. They were on some global trade groups. They basically said HeadHunter.com is one of the most forward-thinking, best management job portals that we know of in the world.

James Fletcher (15:21):

They had been through multiple shareholders, and the management team had stayed through all the different buyout groups within the business. Checked out really well on channel checks. Had no red flags based on their history. Grigorii, their CFO, is just such a straight shooter, and really impressed with Dmitry, their head of strategy.

James Fletcher (15:45):

All of this plays into that ESG analysis. So what we found is a business that had pricing power, had low regulatory risk, was on the right side of society trends, where it’s in Russia’s best interest to reduce the friction of hiring, reduce the cost of hiring, so that more people can be employed within companies. So you’re on the right side of societal trends. Then we found a business that was trading at very attractive valuations and free cash flow and structural growth.

James Fletcher (16:18):

So that gives you an idea. ESG is another tool in the toolkit to find these great long-term compounding businesses.

Clay Finck (16:29):

Prioritizing companies that meet your ESG standards will likely limit the list of companies that are investable. So does integrating ESG and sustainability into your strategy and investment process, does that enhance or hinder your long-term returns?

James Fletcher (16:48):

You’re exactly right. One of the challenges as any investor is how do you limit down the opportunity set, whether you’re investing in the US or China? I mean we have 10,000 companies in our opportunity set of small/mid-cap businesses in emerging markets.

James Fletcher (17:05):

To your question, we find one of the best ways to reduce the opportunity set is to focus on business models that are in our circle of competence, that are proven to be structural long-term winners, and that are best in class ESG and management teams. That gives us a starting point where we’re fishing where the fish are.

James Fletcher (17:27):

Chances of finding a quality company that can be a five-bagger or a 10-bagger and drive substantial outperformance in the long run are few and far between. These are exceptional businesses. And so, what we want to do is limit that opportunity set, and we find that, to your point, ESG management …

James Fletcher (17:50):

And for us ESG also becomes a proxy of company culture, company innovation, employee alignment. These are some of the factors that will indicate high probability of finding these exceptional businesses that can be long-term compounders, and also reduce your tail risk in the long run, reduce your risks.

James Fletcher (18:15):

So part of investing is also avoiding shooting yourself in the foot and avoiding mistakes. If you’re able to concentrate your efforts on higher probability winners, we find this has been a proven formula for success.

Clay Finck (18:30):

Now let’s talk about emerging markets specifically. Investors looking to diversify their holdings could look to invest outside of the US potentially. That may be just in international funds or emerging markets. When looking at historical data, the US is relative expensive when comparing to, say, an international fund. So today’s market may be presenting an opportunity to get a better value when looking at these international funds or emerging markets.

Clay Finck (19:04):

Before we dive in to the specifics, the phrase emerging markets might not mean much to the novice investor. What are emerging markets exactly and what countries are typically included for those invested in emerging markets?

James Fletcher (19:20):

Great question. So emerging markets as defined by MSCI is basically all the countries other than developed US and Canada, developed Europe, and Japan and Australia. The largest countries are the BRICS, Brazil, Russia, India, China, Korea, Taiwan, Southeast Asia, that next set of countries that are developing.

James Fletcher (19:46):

We find great long term opportunities in these businesses. I think there’s risks. There’s political risks. There’s regulatory risks. There’s country cycles. We’ve been through some turbulence in China this year. We went through some turbulence in India last year. We’re going through turbulence in Brazil. There’s always turbulence, but over the long run, we see powerful long-term structural growth within these countries, rising middle classes, rising healthcare penetration, rising IT penetration.

James Fletcher (20:22):

Then on the other side, emerging markets is I wouldn’t say easier, but in some ways more predictable, because they’re five to 10 years behind developed market trends. And so, one of the things we love is seeing the great businesses that are great businesses in developed markets.

James Fletcher (20:40):

Then knowing that EM is maybe five to 10 years behind and riding those tailwinds within those great business models, whether it’d be ecommerce or internet platforms or healthcare, medical devices, or diagnostic services, or especially chemicals. But riding those proven business models in emerging markets knowing that we can follow the playbook in developed markets.

James Fletcher (21:08):

In big picture terms, you’re right, many of your listeners, especially the millennial listeners, may be underexposed to emerging markets. There is something called home country bias that we all have, and we all tend to invest in our home country. Japanese investors tend to invest most of their assets in Japan, similar to European investors and similar to US investors.

James Fletcher (21:31):

But just so you have the numbers, 85% of the world’s population comes from emerging markets. So India, China, Indonesia. It’s over 50% of the world’s GDP now. So it’s 55% of the world’s GDP comes from emerging markets. And yet only 5% of global asset allocation on average is in emerging markets.

James Fletcher (21:55):

Over the long run, history has shown that these numbers tend to converge, that GDP per capita tends to rise, and that global asset allocation will tend to follow those trends. And so, we think access to some of the best companies in India, China, Brazil, Russia are great long-term secular growth companies that we think has long-term tailwinds.

James Fletcher (22:24):

The other thing I mentioned before, I mean just to put a couple more numbers too, but Brazil IPOs have increased 4X over the past five years. India has had substantial IPOs. China, Southeast Asia. You’ve seen some great new economy businesses. Not to say that we have to invest in all the IPOs, but it’s a function of emerging markets are having access to capital, access to innovation, and access to new economy business models.

James Fletcher (22:58):

So there’s a lot to be excited about right now in emerging markets, despite political risks, regulatory risks. I think markets sees Alibaba getting hit and other large Chinese companies getting hit, and you’re worried about it. We’re very conscious of regulatory risks. But this is nothing new for emerging markets. I’ve been doing it for 17 years. You always see these cycles. But long term, I think you’re going to want to be in these great structural growth markets for the next 10 to 20 years.

Clay Finck (23:34):

Are there any emerging markets in particular you’ve put a lot of focus on with the launch of Ethos?

James Fletcher (23:41):

We’re generally diversified across emerging markets. So we have solid exposure in China, India, Brazil. The largest country weight currently is actually Taiwan. I find access to great China exposure through Taiwan-listed businesses.

James Fletcher (24:01):

Taiwan tends to have better governance, higher dividends, pay ratios, more independently owned, and trading at better valuations. So I own businesses that make 70%, 80% of their profits from China, are really China businesses, but I get it through better governance and better valuations into Taiwan.

James Fletcher (24:27):

We’re mindful of cycles of markets. So currently I’m adding more exposure in China. It’s been sold off and there’s been some great businesses that have been thrown out with the bathwater, as they say. India, for example, as a country, we like a lot, but valuations have risen quite a lot this year. And so, we’re trimming some of our exposure in India, being mindful of the outperformance that we’ve seen there. But generally diversified across emerging markets.

James Fletcher (24:58):

Just going back, you mentioned discounts in valuation levels in emerging markets. The S&P 500 is trading it, as you know, as your listeners know, about 25 times price to earnings multiple. Emerging markets are trading it 14 times price to earnings multiple right now. So it’s over a 40% discount of what you’re able to get similar businesses in emerging markets versus developed markets.

James Fletcher (25:23):

So when we’re buying software or internet or healthcare or great consumer businesses, we can get a 40% discount to some of these long-term compounders. So I’m pretty excited to be launching a fund right now where I think we’re at a nice tailwind ahead for the next five years.

Clay Finck (25:43):

Thinking about the US market, valuations are very high. There’s a shortage of great companies and just an immense amount of capital chasing those companies. You’re seeing snowflake IPO at $100 billion valuation and just valuations that we haven’t seen at these levels, say, since the tech dot-com bubble. So I’m curious, what has prevented some of this money from flowing to the emerging markets, do you think?

James Fletcher (26:10):

I think we’ve seen … I mean to be fair, some of the money flow to emerging markets. So there’s certainly a good percentage of companies that are trading at high multiples, especially we saw it in China last year. Some of the A-share traded stocks were trading at very high multiples, which have subsequently sold off quite a bit. India, you see that. Brazil, you’ve had your share of companies that were trading at high multiples.

James Fletcher (26:37):

But for the most part, we’re able to get significant valuations. I think part of it is the numbers we said before, is that global assets are still relatively very underexposed in emerging markets relative to developed markets. Flows tend to follow returns. And so, especially when VC funds in the US and US tech companies are posting great returns, flows tend to follow those returns. But we would just remember that things operate in cycles and the best, highest future returns are usually when valuations are indicating that strong value.

James Fletcher (27:17):

But I would say there’s a good number of companies that are undiscovered as well. So I think last time we spoke, I mentioned a company, NICE Information Services that we had invested in Korea. So they are the Experian or the TransUnion of Korea. So dominant market share, 75% market share within consumer credit ratings.

James Fletcher (27:41):

As we know, that’s a high barrier to entry business, very high return on invested capital, growing double digits, long-term structural growth. What we found was an exceptional management team and family running that business.

James Fletcher (27:54):

But we bought NICE Info at 13 times price to earnings multiple compared to global peers trading at 30 times fee. Even today, it’s trading at a forward multiple of 18 times price to earning. So you’re still getting, I would argue, a very high quality business at a low multiple. The reason is it’s just less known by institutional investors, less covered by the broker community.

James Fletcher (28:21):

On average, small/mid-cap has two analysts covering our universe, which is a study that we did compared to five times for emerging market, large cap, and compared to 10 analysts on average covering US large cap. And so, you’re just competing in a space that’s much less competitive, much less watched over, and, I would argue, as a result, much more inefficient.

Clay Finck (28:46):

Now you mentioned China and how some of those companies have been beaten down. Are there any noteworthy things developing in China that have caught your attention, or could you expand on some of the headwinds some of these companies are facing?

James Fletcher (29:02):

China, and this will not be new to the headlines that we’ve seen, and your listeners, we’ve had debt crisis within the property market of China this year, headlined by Evergrande. But there’s a lot of tier two companies that are struggling with debt levels.

James Fletcher (29:18):

Regulatory risk has been hit in a number of sectors, education sector as an example, livestream video as an example. We’ve been fortunate to avoid a lot of that exposure. Part of it is our ESG scorecards and our analysis process, where if we see regulatory risk or if we see limits to pricing power, or within our research process, if we see that they’ve had regulatory risks in the past or an impact to society, or competing with SOEs over the next medium term, we don’t invest.

James Fletcher (29:57):

So we believe the universe is large enough that we don’t have to take those regulatory risks. We like businesses that have strong pricing power within their core business and low regulatory or societal risks.

James Fletcher (30:11):

China, the big theme this year is common prosperity. And so, I think in some ways China is more predictable than developed markets. In other ways it’s less predictable, but in other ways it’s more predictable. Who will be the president of the us? What party will be in power 10 years from now? I don’t know. I have no idea.

James Fletcher (30:34):

10 years from now in China, I know it will be President Xi. I know he will be focused on common prosperity on the sectors that he has indicated or the long-term structural sectors. And at least that gives you long-term visibility as an investor.

James Fletcher (30:50):

You need a company that’s aligned with government priorities. You need a company that is not competing with state efforts. That’s why, for example, we stayed away from the education after-school tutoring sector.

James Fletcher (31:04):

But in other ways, you have this large market economy with long-term structural growth, with actually a lot of visibility on the sectors that will be supported, the priorities of the government, and who will be in power 10 years from now.

James Fletcher (31:20):

How will US tech firms be regulated 10 years from now? That’s a tough one to call. As long-term investors, you have to make that call. In some ways, it’s more visible from a China perspective than from a US perspective.

Clay Finck (31:35):

Now your expectation is that emerging markets should perform well over the coming years, at least for the long run. How has emerging market returns compared to the US in recent years, say, the past 10, 20 years, whether that’d be just emerging markets in general or the APG fund that you worked with?

James Fletcher (31:55):

I’m glad you asked 10 to 20 years rather than three to five years, because the reality is EM has underperformed over the past three to five years relative to developed markets, especially US tech and US growth. But I would say things operate in cycles.

James Fletcher (32:14):

So to your point, over the past 20 years … I was just looking at this yesterday. Over the past 20 years, end of November to 2001, emerging markets has delivered, I believe, 9.7% annualized US dollar returns and US has delivered 9.2% annualized US dollar returns. The world index has delivered about 9%.

James Fletcher (32:39):

So over 15, 20 years, they’ve all delivered about that same 9% to 10% annualized US dollar returns. What we are coming up on is a cycle where developed markets have outperformed substantially over the past three to five years, and partly for good reason. Developed markets have delivered strong earnings growth and you’ve seen strong tech cycle, which has delivered earnings and fundamental growth. And so, we wouldn’t argue with that.

James Fletcher (33:09):

But EM has also delivered earnings growth over the past 10 years. Some of the lack of returns has come from derating, like we said. So that valuation gap opening up to be that 40% discount.

James Fletcher (33:23):

And so, that would indicate that as long as emerging markets continue to deliver structural earnings growth, which we find a lot of businesses that can deliver solid double-digit earnings growth, then we should be in a good place relative to emerging markets.

James Fletcher (33:39):

So, yeah, I guess I’d caution the listeners not to look at a three-year performance number, to step back and look big picture and understand that asset classes and markets go in cycles. Over the cycle, actually, EM has delivered nearly identical to US in US dollar terms.

Clay Finck (34:00):

I’d like to talk more about your investment process. What are the key areas of focus in your process that have proven to add value and has led to the strong track record of your performance?

James Fletcher (34:14):

We’ve touched on some of this before. I’d say the best way to describe it is we take a private equity type approach to the public equity markets. So we do deep due diligence with the expectation that we’re going to own these companies for five to 10. The best time horizon, as Buffett said, is indefinite.

James Fletcher (34:34):

If we can own a great business with a great management team, and own them for the next 20 years and continue to compound it double digits, then we’re in a fantastic place. It’s deep due diligence before we invest and constantly reevaluating the investment thesis as we invest.

James Fletcher (34:54):

I would say one of the things that we do is that we follow business models, like we’ve said. We define our circle of competence. We define proven business models that Morningstar would describe as wide-moat businesses that can generate from high returns on capital.

James Fletcher (35:12):

We do this because it’s more predictable to say that these high-quality market leaders, wide-moat businesses will be still successfully compounding and generating high returns on capital five years, 10 years from now, then trying to call a cycle within a cyclical business, which we may not have visibility five years out or 10 years out.

James Fletcher (35:36):

So, for example, online job portals, we talked about HeadHunter.com. Internet portals and winner-take-all businesses, whether it’d be automotive portals or job portals or real estate portals, like Rightmove in the UK, these have proven to be exceptionally high-quality businesses. And so, we go find these businesses in emerging markets, and hopefully find them at an early enough stage that we can get in early.

James Fletcher (36:05):

So we invested in HeadHunter.com because we knew that business model. We also currently invest in the largest job portal in Korea. We invest in the largest job portal in Taiwan. We invest in the largest job portal in India and a job portal in China as well.

James Fletcher (36:22):

And so, it really is finding, discovering, becoming experts in not even a sector, but a specific business model that’s proven to be successful over the long run, and then finding that market leader within emerging markets. We’ve done similar things on credit bureaus and done similar things on especially chemicals, where we’re finding these exceptional top five decile businesses and then owning them throughout emerging markets.

Clay Finck (36:53):

Yeah, that’s very similar to Buffett’s investment approach, except applied to emerging markets. One question that’s been on my mind as of late is how much cash one should have in their portfolio? On one hand, the opportunity cost of holding cash seems to be very high since we’ve been in this long bull market and we’ve seen higher inflation recently. But on the other hand, the overall market is, like we’ve discussed, for the US, very expensive. So I could also understand the argument for holding a decent amount of cash.

Clay Finck (37:27):

So my question to you is how do you think about cash in your portfolio? Maybe share your typical cash allocation in your portfolio.

James Fletcher (37:37):

There are two buckets here, is how you invest on the personal side and how you invest on the professional side. So for me, on the professional side, my clients expect me to be fully allocated. So they expect my best 40 stocks in emerging markets and that’s why they’re investing in me. They’re not investing in me to speculate over the short term, whether I think we’re going to have a selloff in the next six months and hold more cash.

James Fletcher (38:06):

And so, professionally, we’re fully allocated. Incidentally, I’m terrible at predicting market cycles. You can see great businesses over the long run and great long-term trends. But if you ask me what the stock market will do in six months or 12 months, I’m terrible at predicting that. So it would be a useless exercise to hold cash and try and generate extra returns from holding cash.

James Fletcher (38:36):

To be fair, there are periods of time where we’ll have 3%, 5% of portfolio in cash, and that’s more frictional cost. We just sold a large position and now we’re allocating it to another position.

James Fletcher (38:51):

There’s an argument to have some cash so you’re ready with dry powder when a market opportunity arises. But it won’t be more than 5%, 10% cash in our portfolio because our clients expect us to be fully allocated.

James Fletcher (39:05):

From a personal standpoint, like to your listeners, young millennials, there may be more argument for holding cash, especially if there’s expenses in the future in purchasing a house or purchasing a car, or even you’re wanting to have more dry powder for if the market sells off, or more financial stability.

James Fletcher (39:29):

So I think that is a personal decision of how much cash you’ll have to manage those assets. But, professionally, we’re fully allocated, and that’s proven to be a great strategy. There’s been times where I’ve thought the market looks expensive. Maybe I would’ve been biased to hold more cash. Those have been the next two years where we’ve seen massive bull markets and, thank heavens, I wasn’t in cash. And so, I think just focus on great businesses is a successful approach to investing.

Clay Finck (40:03):

Switching gears, you’re also the founder of Young Investors Society, which offers investment and financial literacy education to teens, which just tells me so much about your character that I respect so much. Could you tell our audience a little bit about the Young Investors Society and how you’re partnering with schools to teach financial literacy?

James Fletcher (40:26):

I appreciate the compliment, Clay. I selfishly just gained so much from being part of the organization and meeting the next generation of investors and speaking to teenagers. I think it just gives me, personally, so much energy and fulfillment.

James Fletcher (40:43):

As we were talking before this show, we both read Buffett when we were young. It had an impact on our lives. What we find is that when we teach fundamental long-term investing principles to junior high or high school kids, it gives them a vision of, one, a potential career in investment management. But I’d say more than that, how to think long term, how to think about businesses. You get to understand accounting, you get to understand economics, you get to understand history and psychology, because so much of investing is really psychology.

James Fletcher (41:21):

Then in the end, we’re all investors. We all will have 401ks. We’ll all have to manage our portfolios. It’s such a skill that I think we are still shocked that it is not mandated to be taught in schools, in high schools.

James Fletcher (41:38):

Personal finance is such a critical skill that most Americans fail at. Two-thirds of high school kids fail basic financial literacy test, and we think this is atrocious. Even the stock market game, which is how most kids learn about investing in stocks. I don’t know if you did the stock market game in high school. I did.

James Fletcher (42:00):

But it’s great to expose kids to the market. But basically you’re saying try and outperform the market over a three-month period of time. It teaches kids to take as much risk as you possibly can. That’s investing is basically ramping up your beta and trying to outperform over a three-month period of time.

James Fletcher (42:20):

That’s not investing. Investing is owning great businesses over the long run. Investing is managing your finances in a structured, in a robust process. And so, we’ve been blown away, actually, by Young Investors Society, the impact that we’ve been able to have in kids’ lives and how fast it’s grown.

James Fletcher (42:39):

So before COVID, we were at 450 schools and now we’re in 1200 schools in 24 countries, 47 states. We’ve just seen so many teenagers thirsting for that knowledge. So many kids are doing Robinhood and reading Reddit and investing in GameStop. Young Investors Society is able to come in and say, “Take our modules, take our classes. Learn how to properly analyze a company over the long run. And, hey, if you like it, then prepare for a career in investment banking or asset management.” So it’s been amazing. It’s been just a really fun journey.

Clay Finck (43:23):

Yeah, it’s something I wish I definitely had at that age. I didn’t get into investing until after high school. I started learning about it, I’m like, “Why is no one talking about this stuff?” It’s like taboo subject.

Clay Finck (43:35):

Now you talked a little bit about how you help guide these younger people into a career of investment management. So what advice do you give to these students to try and pursue that type of career path?

James Fletcher (43:49):

We have one of our most popular lessons at Young Investors Society called the Seven Golden Rules of Investing. These teach some lessons like think long term, do your own homework, continue to learn, always be learning, don’t follow the herd. These are some basic lessons in investing.

James Fletcher (44:10):

I think the fun thing about investing is that you can read books and you can invest on your own. So it is an apprenticeship like most crafts, but it’s unusual that the masters like Warren Buffett and Peter Lynch and Joel Greenblatt have written down their manuals of success. You can go read their books. You can read how they invested. You can analyze their track record. Then, very easily, you can open an account and start investing on your own and start testing those principles.

James Fletcher (44:41):

So it’s an unusual craft that anyone can read a book and pick it up on their own, and then start to gain experience. So I tell teenagers and college students start reading and start investing. Start buying stocks and read from the greats. Find out whether you lean towards value investing or growth investing, or how often you want to trade. Figure out yourself through that investing lens.

James Fletcher (45:09):

The second piece of advice I give to those looking to get into the career is in the end, it’s all about people. So I’ve been incredibly fortunate and blessed in my career and great mentors because I’ve worked on great teams. Investment management is an amazing industry that you can basically put a couple of people in an office that have knowledge and experience and the right temperament, and they can create millions and even billions of dollars in value through just a handful of people. So then the question is can you align with those right people? Can you learn from them?

James Fletcher (45:49):

So it’s all about people. I mean I was fortunate enough to join teams and join people that were incredible mentors to me. Some of the choices relationships I have are those people that I’ve met along the way and shared ideas with and learned from.

James Fletcher (46:06):

I mean that also applies to investing in companies. The best long-term compounders are made up by great people, by great management teams and people you trust and people that are innovative and can execute and are ethical. I invest in people first and then business models. Then prices and numbers third. But it’s really I’m investing in people.

James Fletcher (46:31):

The second point would be it’s all about people. I think as a young college student, high school student, someone starting out in the industry, don’t underestimate the value in reaching out, building that network.

James Fletcher (46:48):

There’s many professionals like me and many like me in the industry that love teaching, that love mentoring, that love talking to the next generation. So don’t be afraid to reach out and build that network, build those connections. I guess I would personally say to your investors, I’ve been blessed by amazing mentors in my career and I try my best to pay that forward.

James Fletcher (47:11):

So feel free to reach out. I’m active on LinkedIn. Feel free to reach out on advice, stocks, any help that I can do. But I have been blessed by great mentors and I strive to be a great mentor myself. Through Young Investors Society, I think we’re making a difference in many young lives as well.

Clay Finck (47:32):

That is fantastic. I agree that there’s just so much information out there around investing, whether it’d be podcasting, YouTube, Twitter, and just credible books and people like Warren Buffett and their wisdom.

James Fletcher (47:48):

Yes.

Clay Finck (47:49):

You can go to Amazon and buy some of the best investing books out there for $15 or $20. It’s just learning those fundamental principles that’ll last a lifetime. It’s just so invaluable.

Clay Finck (48:01):

James, thank you so much for coming back on to the Millennial Investing Podcast. I really appreciate it and really enjoyed this episode with you. Before we close things out, where can the audience get to connect with you and learn more about your fund?

James Fletcher (48:14):

I mean, first off, Clay, it’s always an honor to be with you and The TIP and the Millennial Investing Community, something I’m passionate about and I enjoy the time.

James Fletcher (48:25):

As I said, I’m active on LinkedIn. So feel free to connect and reach out on LinkedIn. Ethos Investment Management is launching in January. So you can see the website, ethosinvest.com. We’re aligning some great client base.

James Fletcher (48:41):

I also hope to do videocasts and updates and thought pieces that you’ll find on the website as well. I really think demystifying investing, especially in emerging markets where China and India may seem mystified, I think we can all do our part as investors to demystify emerging markets, and these create opportunities that we see. So we’ll be active there as well.

Clay Finck (49:09):

Awesome. We’ll link all of those in the show notes. Thanks a lot, James.

James Fletcher (49:13):

Thanks so much, Clay.

Clay Finck (49:15):

All right, everybody. I hope you enjoyed today’s episode. Please go ahead and follow us on your favorite podcast app so you can get these episodes delivered automatically. If you haven’t already done so, be sure to check out our website, theinvestorspodcast.com. There you’ll find all of our episodes, some educational resources we have, as well as some tools you can use as an investor. With that, we’ll see you again next time.

Outro (49:38):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday we teach you about Bitcoin and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.