Most of us, when we’re younger, we want to believe the authorities. We want to believe the rating agencies. We want to trust government statistics or authorities of all sorts. It happens, as you grow older… where you become convinced that they all lie and everything is phony and everything is false. And I mean everything. Everything.Anthony Deden
I’ve always had somewhat of a knack at assessing the contours and frameworks of any subject matter I delve into, and an even more pronounced knack at recognizing the misfits and revolutionary thinkers in a field.
On the one hand you have the good thinkers who are trusted sources of information on the currents of a field. These are the people that you can learn the ropes from, the people who give you the coventional details and who can outline the territory to you.
Then you have the great thinkers, the ones who shift the paradigm, the ones who stand alone outside any conventional path carved up by the rest. These thinkers are lantern-bearers wading into the unknown, lighting the way for the rest of us.
Anthony Deden is a great thinker. Listening to Deden is like rewiring your brain to think on an unconventional paradigm. I hope to write many articles in this ‘Investing lessons’ series and I’m grateful this is the man I’m starting with.
Anthony Deden: The man behind the mind
Deden has had an unconventional trajectory within investment management. Born in Greece, he spent a few decades in America and wasn’t particularly involved in finance. He was gently thrusted into this world by a mentor, many years his senior, who recommended him to a family that needed investment advice.
It seems that Deden began as some form of an investment advisor and began to take things more seriously as time went on. One family slowly became two, which became three, until he was a fully fledged investment advisor without training. According to Deden, he ‘had to learn a great deal by the sheer desire to do the right thing.’
This attitude of doing right by these families was born out of a concern that he was essentially dealing with the lifetime savings of an entire family. This is all the wealth this family has and will ever have. Deden realized the nature of capital: irreplaceable. You must respect capital and recognize its irreplaceability in order to avoid errors that would put the family out of business.
The only goal was to avoid ruin.
He wasn’t exposed to equities in the crash of 1987 so was able to deploy a lot of capital during the years that followed. Deden understood his ignorance in the field and erred on the side of inaction wherever he could. Learning as much as he could from friends in New York, or by reading the great value practitioners such as Graham, Dodd, Buffet, or even by reading the Austrian and classical liberal traditions in economics, Deden was interested in fundamental questions on the nature of money and interest rates.
He gradually arrived at the realization that most conventional conceptions on matters bear no relation to reality. So when it came to the nature of risk and portfolios, he valiantly declared the mundane musings of the industry as nothing more than nonsense.
For Deden, ‘risk was the idea of losing your capital permanently with no ability to ever recover it.’ Which is why he changed his entire framework and then explained to the families he was serving that his new single investment policy is simply protecting, enhancing, and deploying the capital permanently. He explained that there had to be some time horizon with a purpose for long-term deployment of the capital.
The Eden of Deden
Anthony Deden embodies his investment philosophy in his character. Sitting calmly with the Swiss Alps sprawled across the background in a world where time seems frozen, subtly reflecting the permanence of his investments and his ideas.
There are three pillars to Deden’s thoughts:
These three ideas are the core of his oeuvre at his investment holding company Edelweiss Holdings Ltd, woven into the fabric of every position and every thesis Deden commits to.
Scarcity is a foundational ‘law’ in economics. You know the story: there are a finite amount of resources on this great planet of ours and there are ever-increasing populations with a seemingly unlimited list of desires. This finiteness of resources and its contrast with the infiniteness of man’s desire creates scarcity.
Even before the birth of the disciplines of moral and political economy and economics in the past few centuries, thinkers, and humans generally, have always contended with the question of scarcity. Thinking about it, scarcity is at the root of the fundamental questions of civilization. The struggles of man arise from the insurmountable forces of supply and demand, which rest on the bedrock of scarcity.
Deden succinctly describes it as ‘no one can have all that they want’. Scarcity exists not only in tangible assets, but in the very intangible too. A good example of this is that one great and precious commodity that we so unwittingly spend: attention. Attention is scarce and every business is vying for our attention. The scarcity and finitude of attention is what makes it so valuable.
So for Deden and, in fact, for the rest of the investing ranks scarcity is key. Scarcity is a driver of value itself: find scarcity and you have found value. Deden gives the example of art. What makes a painting as valuable as it is? Surely not the canvas, nor the paint? It’s the fact that there’s only one.
‘So scarcity, in all of its permutations, is an important ingredient in any action that deploys capital for the future’, Deden teaches us. When thinking of where to deploy your capital you don’t want to park it anywhere. Your aim should be to find a business which is involved in something scarce, a business that is unique, producing something that is unique, and the best in the world at what it does.
One method of finding scarcity is analyzing supply chains and breaking them apart. Deden gives a masterful example: a lot of people like whiskey, but a lot of people make whiskey and even whiskey bottles and even the glass that the whiskey bottles are made of. No scarcity there. But how many people make the machine that makes the bottle itself? Scarcity is found by hunting for scarcity.
This idea of scarcity is intertwined with the ideas of barriers to entry and moats in a business. Deden refuses to invest in a company that is involved in activities with low barriers to entry even if they have a brand. You want scarcity in technical expertise and position in the market, you want scarcity in the position the company occupies in the supply chain, you want scarcity of the type of goods and services. That way, the business builds a large moat and puts up impossibly colossal barriers to entry, and you and your capital can rest safe knowing this company that you have chosen is in a blue and clear ocean, free from the bloodlust of other sharks.
I didn’t fully appreciate the idea of permanence and endurance until I heard Anthony Deden talk about it. I began to think of investments not only in the time horizon of a single lifetime, namely mine, but began thinking about building intergenerational wealth that will stand the brute force that is the future.
When Deden invests, he’s thinking lifetimes ahead.
The affinity to permanence stems from the idea that it is easier to make money than it is to keep it: the irreplaceability of capital. Deden began looking at investments he owned in companies that had been around for over a century and started searching for the reasons that had allowed them to survive crises from war to inflation. Exactly what are the ingredients that allow a company to survive time?
An example he gives is of an investment in a traditional French barrel making company, the complete opposite of the latest growth tech stocks we’re all piling into nowadays. Deden likes this business because it is not sexy, he knows they are the best at what they do and have been doing it for a long time. Being ‘only’ a quarter of a billion in size and only recently expanding operations internationally, they will be around half a century from now and will grow a few times in size in that long time horizon, all the while they will be making the same high quality barrels using trusted techniques that have passed the test of time.
These businesses are not chasing growth and leveraging their balance sheets. They’re simply the best at what they do. There is a certain scarcity in their skillsets and an enduring quality in their business.
What if growth was not the only metric that mattered, but endurance and permanence were the real goals?
Deden admits that permanence is ultimately an illusion that we chase. The key to investing in these enduring companies is finding robustness and antifragility. Borrowing from the great Nassim Taleb, Deden recognizes not only the importance of adaptation for survival, but the importance of being able to gain from disorder: antifragility.
Scarcity and permanence are qualities that you have to cultivate. A company only survives one hundred years by adapting to the times and benefitting from the vagaries of the ages.
A key factor in cultivating this robustness and permanence is knowing that the people who own and run the business are responsible, knowing that they have the best interests of the business at heart. In our hyper-financialized world where the machinations of management mean that the upbeat of the company ticker is all that matters, finding people who simply want to do the best job they can is what it is all about.
Scarcity and permanence in a company also arise from having a certain independence. There are two streaks of thought to explore here: independence in the business you want to invest in, and independence in yourself from the rest of the financial world.
Deden’s investing philosophy functions via negativa or as he terms it: the principle of exclusion, which is to say that he focuses more on what not to invest in than what to invest in. By ruling out thousands of possibilities, he’s left with a few dozen companies that fit his strict criteria. But because of his strict criteria, he knows he’s found diamonds amongst the dirt.
A good example is his lack of enthusiasm for transport companies, whether airlines or trains, because these companies have no operating leverage. Being right at the end of the consumer supply chain means that they are subject to inputs and costs that are beyond their control, such as mercurial government regulations.
These businesses lack the vaunted independence that Deden craves. If you are going to put your irreplaceable capital somewhere, it better not blow up at the whim of some third party.
The people who run this company should demonstrate a hgh level of faithfulness to the business. And if Deden finds a series of actions that are not in the best interests of the business, he will quietly walk away from the entire investment.
This kind of independence in the supply chain and independence in business allows you to sleep at night, and it makes life simpler. You’re not worrying about what’s happening in this industry, or what deals were made there, or the advent of some new regulations or events. The business you have chosen is reliably in control of what it does, and is reliably in demand at the root of the supply chain.
You want a business on which a row of other businesses are dependent, so that if this business was to fail it would cause a domino effect, collapsing an entire supply chain. That way you know what this business does is so crucial that failure is a remote probability and the entire industry has a vested interest in this business staying afloat. But most importantly, it’s got evergreen demand.
Will your business stay standing once the market crashes?
An example Deden gives is a chemical company that produces polymers. Nothing to shout about. But this company has operating margins unheard of in the industry. The company also solves problems no one else is solving nor did they ever think to solve them. One of their products is the little exciter that goes into airbags in automobiles around the world. Boring product, necessary demand, great investment.
4. The trouble with prosperity
Independence doesn’t only matter in your choice of investment, but in yourself and your philosophy as well.
Deden has completely detached himself from the larger financial world with all its illusory hustle and bustle. In Deden’s mind the financial industry has failed in its sole responsibility of protecting the wealth that clients have spent a lifetime accumulating. So deep is his detachment from the world of finance that he always emphasizes the difference between an economic and financial cause or agent, always pointing out that finance is not the economy.
Deden laments the start of this era in which actual productivity and industrial activity took a backseat in being the driver of the economy, being replaced by finance. He pins the beginning of this age to some time around the mid to late 90s.
Monetary policy has always played some role in financial matters but something happened wherein monetary policy became the driver of the economic engine. Prices of securities began an ascent independent of underlying economic realities and activities. This new epoch began in the United States, and, as always, the rest of the world followed along.
Interestingly, Deden lays some of the blame here on private equity:
‘Private equity’s nothing other than regular equity that’s leveraged. Because of the ability to borrow unlimited sums to buy unlimited things, and their ability to turn them over, they’re able to pay prices in the marketplace for businesses that are perhaps higher than the owners think they’re worth. Their business is to extract substance out of such companies and get rid of them. Their business is to make money from their security. This has distorted the market’s ability to find, to discover, true value in terms of price. The price discovery is really distorted immensely on account of both monetary experimentation as well as the moral consequences of such policies among economic actors.’
Once prices became detached from reality he began to think that there must be some sort of giant mistake. It had to be one massive prank. Doubting himself, he thought maybe the world had changed forever and he was stuck in his old ways. Maybe he was rigid and the world was sane. Deden went soul-searching.
He stumbled upon the answer through vigorous soul-searching and retracing of steps and looking for direction. This then led him to write a speech for his clients with a title borrowed from James Grant’s book: ‘The Trouble with Prosperity’. Realizing, with the help of that book, that there was this apparent prosperity the causes of which must be examined. ‘Unless you examine its causes, you don’t know to what extent it is real or it is an illusion’.
He goes on to draw a bleak picture: if you gave me your American Express card and I then go on a massive shopping spree, I can buy all this stuff and show off and people will think I’m deeply rich because I have all this material stuff. I’m wearing nice clothes, driving a nice car, I’m even contributing to GDP! But, as my previous article showed, indicators of economic trouble are interlinked. Excessive credit and stagnant wages in seemingly moderate waters was one of the drivers of the 2008 Global Financial Crisis.
The trouble with prosperity is that prosperity can be a mirage.
Deden became convinced that in an era of quantitative easing the system was going to destroy the nature of money itself. The rules had changed. ‘When the rules change, the basic framework with which you make decisions needs to change’. People think pre-2008 was normal, but the ills of financialization were rampant even pre-2008.
As Warren Buffett has famously remarked, when there is rampant greed and things begin to get out of hand, be fearful. Deden exhorts us to examine the causes of booms, and to examine the very framework in which we’re operating and adjust our rules accordingly. When the game changes, we must also change.
This is an esoteric lesson. Just because all ships are heading in a certain direction it doesn’t mean it’s the right way. Think for yourself and examine your assumptions and the assumptions of the millions who make up the ‘market’. That’s cliche by now, but for Deden it is completely natural to begin with pure scepticism. His thought process is ‘something has got to be wrong here’. Begin with the assumption that everything is fake. Everything. All sources of media and information are lying to you. Now, what do you do?
5. Exclusion: tuning the noise/signal ratio
As I mentioned, Deden operates from his principle of exclusion. There was once an age not long ago when you would have wanted all the information you could get a hold of in most matters in life and the markets. Information was in itself scarce and took serious effort to finely collect and curate.
The trouble of our age is that we have access to too much information. The inversion of this problem began once mass communication and the internet were created. Ours is a problem of abundance and so our goal is to block out the noise as best we can, to filter out the nonsense and the irrelevant.
Our epistemological sieves need fine-tuning.
So what you do is work from a first principles approach and really try and see the underlying scaffolding behind reality and the markets. Deden will seek out reasons not to invest in something.
It’s not necessarily important to always be looking for opportunities. What is important is to acquire an understanding so that you can recognize the opportunities when you see them. If there is an opportunity, it comes across for everyone to see, but very few people recognize it. So the people that recognize it are prepared to recognize it.
Deden explains that you will need understanding of the business, the sector, and the market. This takes an immense amount of time and effort and it’s rare that you’ll come across a real opportunity, but you must keep learning to ready yourself to recognize opportunities and filter out the noise.
Filtering out the noise comes in many forms. For example, Deden talks about EBITDA (an accounting construct: earnings before interest, tax, depreciation, amortization). ‘EBITDA is not traditional. The only reason EBITDA is around is on account of the ability to finance acquisitions to credit. Were it not for credit creation, there wouldn’t be an EBITDA.’
He always refers things back to how an actual business owner would think about things and points out the absurd nature of the idea, for example, that an owner of a business would think in terms of certain multiples and so on.
‘We think of industries in financial terms now rather than think of the industries themselves. What is the business? Who are the customers? That’s been turned completely on its head. We now look at: What are the earnings per share? What are the forecasts for the next twelve months?’
When our illusions begin to suffocate us, always go back to concrete reality. These statistical constructs are not always useful. Look at the business and look at the owners of the business and think not of owning shares, but having participations in the business. Get some skin in the game. If it was your money, would you do anything different?
‘I think that what’s missing in our world is this ability to have tools with which to think about the economic value of a business endeavor rather than its financial value. It’s easy to say, “This company sells for X number of dollars a year,”. What’s difficult is to say, “What is this company worth, and why?”‘
Deden’s focus eventually became businesses that are real and independent of the financial world. He also tuned out any news and chatter from the financial world after realizing that there is a massive distinction between an owner of a business and an investor. He explains, after purposefully extracting himself and his team from the financial world, that this extraction and exclusion causes your mindset, your vocabulary, your philosophy, and your practice to change. Everything changes.
This point applies to all fields but even more so to finance. Consensus and mimesis will largely shape not only the way you act, but the way you think, and most importantly, the way you imagine and your conception of what’s possible and what’s necessary. By truly freeing yourself from the anchor of the endless babble of online posts and media heads, you can begin to reflect on constructing a portfolio that has permanence at its core.
6. Portfolio construction
Portfolios have a purpose and every asset within that portfolio has a purpose. You must make portfolios with purpose. Each asset is there for a reason.
Deden unapologetically declares that the way the financial industry markets portfolio construction is a farce. Sitting down with a client and asking them what their risk tolerance is and balancing a portfolio based on that. This is an exercise in futility. Clients don’t usually have the correct definition of risk to begin with.
Risk is ruin. If we accept the definition that risk is simply permanent loss of capital (it’s the only metric that really matters) then portfolios and the assets within them should be geared towards permanently deploying and enhancing capital.
He compares modern methods of diversification to an automobile manufacturer who whilst making a car declares that X% of the car should be made of steel, Y% should be made of glass, and Z% should be made of some other material, for example. It’s nonsense. The proportion of materials in the car should be constructed and fine-tuned to fulfill the purpose for which the car is being made.
In this sense, each of Deden’s investments has a purpose in relation to his larger portfolio, and in and of themselves. Any business he invests in engages in some meaningful activity, in some meaningful sector, providing meaningful goods and services to the market. A row of these meaningful ‘participations’ (i.e. investments), as he terms it begin to make up a portfolio which itself has some purpose, made out of assets that have been selected for a purpose.
This mode of being wherein everything has some purpose may seem slow in the short-term, but that’s the point. It’s a marathon of deliberation, not a sprint for burning out. When you’re thinking in generations, it’s the surest method to flourish.
Gold is the perfect metaphor for Deden’s ideas and temperament. It’s real, it’s permanent, it’s scarce, and it’s independent.
Deden holds around 35% of his portfolio in gold which is then deployed to an investment in the rare chance that something gets past his highly-tuned filter. Gold has served mankind for thousands of years as a place of refuge and so it is more real than anything that can be printed on demand. He jokingly states that gold, in terms of a P/E ratio, has P but no E. For Deden it is purely a storage mechanism and he doesn’t care whether the price goes up.
‘I own it because, had I not owned gold today, I would own treasury bills, I would own short term commercial paper, I would own cash deposits and other such things to provide me liquidity because I think that roughly about 60% of our capital is permanently invested. 35% of [our capital] is in gold and is liquid. I want it liquid so I can exchange it for participations like the one we have in the future at some point.’
‘And I think any good investment operation, particularly if it involves irreplaceable capital, must have embedded in it a source of continuity and substance and reserves. So, some years ago, I would not hesitate to buy treasury bills, commercial paper, short term bonds, time deposits. But I have come to believe that virtually all of those things I just mentioned, they’re actually debt.’
When you deposit money in a bank, it becomes a liability of the bank. They don’t hold it in their vault. Buying a treasury bill is buying somebody’s debt, yet it is called an asset. Bonds are debt. Deden decided he wanted his liquidity to not be someone else’s liability. Liquidity should be an asset.
Taking this into account, and taking into account the three pillars of Deden’s thought, it’s inevitable that he would have such a large holding in gold:
- Gold gives him scarcity.
- Gold has permanence and has served man for thousands of years.
- Gold gives him independence from the financial system. No debt. Just assets.
Deden states that they own around three tons of gold and at one point, it was more gold than some of the central banks of the world owned. He takes pleasure in knowing that he possesses financial strength that not even central banks do. Since gold is not a claim or a promise on anything. He can physically hold it and store it, and sell it.
Gold is real.
The nature of gold is in complete contrast to Bitcoin which he avoids because he doesn’t know what it is. If he can’t see it or understand it, and because it is so new, Deden can’t consider it as part of the permanent portfolio that he has pledged he would construct to perpetuate the wealth of his clients.
By understanding the nature of gold, you begin to understand Deden’s mind. And like gold, there will always be some people who think not in decades, but in lifetimes and generations.
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