Geoffrey Batt – The Nature of Transformational Returns

**Patrick O'Shaughnessy** (0:04)
Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_3** (0:24)
Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (0:49)
My guest this week is Geoffrey Batt, and the topic of our conversation is how to earn transformational returns in very hard markets. In his case, that means Iraqi equities, which we cover in detail. He now runs a large pool of capital in Iraqi stocks through his firm, Euphrates, but the journey was arduous to say the least. This is one of my favorite boots on the ground contrarian investment stories thus far in the podcast. I hope you enjoy the story and the lessons that Geoff has to offer.
So, Geoff, this is going to be certainly one of the more unique equity investing discussions that I've ever had centered on investing in Iraq specifically. But before we spend a lot of our hour together on that topic, I want to frame this with a notion that we talked about on the phone. I think we'll call this episode the nature of transformational returns. In several places, you've talked a bit about what it takes to earn the kind of 25, 50X returns that massively change an investor's life.
And how everyone wants that, but the actual experience of getting it is massively hard and uncomfortable. So maybe you could frame our entire conversation with this simple idea of what it takes to earn transformational returns.

**Geoffrey Batt** (1:53)
Well, just looking at the history of markets and asset classes that have produced these sorts of returns, the first thing that stands out is that it requires an extraordinary amount of patience. Time is a major component of it. By time, I mean these sorts of historic equity re-ratings that produce these returns can take 10 to 15 years to generate those results.
If you take the case of Japan post World War II from, say, their bull market, more or less began right at the beginning of, say, 1950, 1951, and it lasted until 1989 And it's still below its peak today in 1980 But that's almost 40 years. And I think it produced a 100,000% return in dollar terms. But over that 39, 40 year period, there was maybe a decade when the market did nothing. People in the West were questioning your sanity if you were talking about Japanese equities in a constructive or positive way. Now, that's an extreme example. I don't think anybody could really hold on to an investment for that long a period of time. But you look at other markets that have done maybe not 100,000%, but maybe 3,000 to 5,000%.
And what you typically find is that there's this lengthy period where sort of nothing good happens to your investment. But at the same time, you're enduring a great deal of volatility in the country, whether it be political or economic. And you can get to certain situations where things look really dire and you start to question whether you've made a terrible mistake. You have to be able to have the temperament and the conviction and the analytical ability to see through all the fear and emotion and really try and figure out what's happening and whether the investment still makes sense and sort of accept the fact that you might have a decade long period where you have nothing to show for your investment.
So it's incredibly challenging and most funds, the way they're structured today and the expectations that most investors in hedge funds and mutual funds have, I'm not sure that it's possible for funds to capture those types of returns, given the constraints that they face. And you have some funds that are reporting performance on a weekly basis, I guess mutual funds are reporting performance on a daily basis. But if your hedge fund is a long term investment for you, might be six months, maybe a year. And if your LPs are fund to funds or people who themselves are having to report performance to their investors on a short term basis, they usually pull their money from you at the first sign of trouble and it just makes the structure of your fund very unstable.