John Armitage: How He Invests, Building Egerton, and What Worries Him About AI

John Armitage (0:00)

If you use AI too much, your brain is going to rot. And it's quite simple. People who don't do mental arithmetic, lose the ability to do it. It's just simple. So we want AI to help us and to short circuit things. But we don't want it to think for us.

Hi everybody.

Nicolai Tangen (0:31)

John Armitage has been the most important person for my professional development. I traveled with him for several years when he was my largest client back when I was an analyst. And then I worked for him for five years at Egerton Capital. Nobody has taught me as much about investing in markets as John has. So John, it's an honor and long overdue to have you here.

It's going to be kind of a master class, how to look at a company, how to build a position and how to run a firm for 30 years without losing your edge. John, welcome.

John Armitage (1:02)

Thank you very much. It's a great honor to be here.

Nicolai Tangen (1:06)

Let's start with the basics. What is a good company?

John Armitage (1:10)

Well, you know, I think, first of all, obviously, there's a difference between a good company and a good investment. And second, and I would say, look, many things go into something being a good company. And today, today, a lot of people talk about moats. Moats are critically important. But at the same time, if you have a moat without the right management, you get destroyed. And look at Boeing under its previous CEO.

Look at Rolls-Royce before the brilliant new chief executive who's running it. Rolls-Royce had a moat, but somehow, as he put it, it was a burning platform.

I would also say that if you think about the theoretical value of a company, it's the value of the future cash flows. Therefore, how those future cash flows are invested is important. So one of the things that's important is capital allocation. And if you think what Berkshire Hathaway originally was, it was a New England textile mill, which got closed. And look what it turned into. And that's because of capital allocation and culture. And I think culture is critically important in a company.

And look at the way Intel lost its way for such a long period. And that was because they didn't dare to innovate, they didn't dare to enter new fields. And there was a business with incredible market shares getting eroded. So I think culture, capital allocation and moats are all very important.

Nicolai Tangen (3:00)

What's the first thing you look at? So here I give you, okay, this is a company, this is a new idea, what is the first thing you look at?

John Armitage (3:06)

Well, the first thing I look at is, is it worth the time?

Nicolai Tangen (3:10)

How do you decide that?

John Armitage (3:10)

Well, many businesses are fairly priced. There's no point in spending a lot of time on something which is fairly priced. What is the point?

And the second thing I think about is, can I understand it? Will I understand it? I once had a very interesting meeting with the CFO of a drug company. And I asked him how they were able to assess whether a phase three clinical trial would be successful or not. And he said, look, we can't assess it. We just think of them as a series of options. And I sort of thought to myself, well, look, if you're the CFO of one of the largest drug companies in the world, and you don't know whether a phase three trial is going to be successful, how the hell am I getting to?

Nicolai Tangen (3:50)

So how many, so what are the type of companies you can understand?

John Armitage (3:54)

Well, we try to understand as many types of companies as is possible.

And where, look, I'm not a physicist, I can't write code, but I'd like to try and feel that I can understand why NVIDIA might be successful. And what's very important for us is to understand the inherent operating leverage in a business, by which I mean, what is it that will make it massively out or underperform expectations? And if you can't grasp that, I think you're on a hiding-to-nothing.

Nicolai Tangen (4:31)

How many great companies are there?

John Armitage (4:34)

Probably more than you think. And we own some of them, and there's a lot we don't own and haven't owned. But the nature of great companies changes over time. Look, Coca-Cola is a great company.

And there isn't a substitute for Coke. But the fact is, it's probably underperformed the market in the last 25 years. And why is that? Because they haven't come out with the new Coke.