C-Suite Talks: Bill Browder


Were it a work of fiction, Bill Browder’s story would stretch the bounds of credibility well beyond the breaking point. But as it happens, it’s all true: The scion of American communist royalty, he became a devout capitalist and made his fortune in the privatization frenzy that developed in Eastern Europe following the collapse of the Iron Curtain.

And then his saga, which is detailed in his bestselling Red Notice, gets even more interesting. From the falling out with the Vladimir Putin regime to the championing of the Magnitsky Act, Browder’s life morphed from an unconventional success story into a tense and harrowing thriller.

We spoke with Browder, who will be addressing the 2019 SALT Conference this May, for his take on the current geopolitical environment, the investment management landscape, what advice he’d give to his younger self, and more.

Below is a lightly edited transcript of our conversation.

CFA Institute: Thank you for taking the time to talk about all things investment management. In Red Notice, you compare the thrill of an investment “ten bagger” to discovering crack cocaine. Is this how you found your way into investment management?

Bill Browder: It actually goes back a little bit further than that in that I ended up first of all being interested in Russia because of my rebellion from my family. My grandfather was the head of the Communist Party of America during the 1930s and 1940s, and so when I was going through my teenage rebellion, I became a capitalist.

When the Berlin Wall came down, I decided that if my grandfather was the biggest communist in America, I would try to become the biggest capitalist in Eastern Europe. It was then after that, after I graduated business school, I moved to London to try to be closer to Eastern Europe.

In my very first job as a management consultant at the Boston Consulting Group, I went to Poland. In Poland, I saw they were doing the very first privatizations, and I bought shares. I had a total of $2,000 of life savings. I invested the $2,000 in the Polish privatization. It went up 10 times, and at that point, the whole thing crystallized.

From that point on, I knew what I wanted to do, which was to be an investor in the privatizations in Eastern Europe, and set out to do so.

What were your formative influences?

Probably the most formative influence was a boss that I had at Salomon Brothers, a guy named Bobby Ludwig, who was head of the proprietary trading desk at Salomon. He was like no other person I had ever worked with. He was completely unmoved by conventional wisdom, or by fads, or what was popular. He was the most clear‑thinking value investor I’d ever met.

When I was discussing different types of situations with him and seeing his reaction, and seeing his disdain for what everybody else was doing, it helped me get into a mindset of thinking independently about investments, and not worrying about what everybody else thought.

That was crucial because when we discovered Russia, everybody thought at the time that it was crazy to invest in a country in such a chaotic mess. The chaotic mess part was true, but the valuation of Russia was at a valuation discount of 99.7%.

The logic was that even though it was horrible, if you went from horrible to bad, you can make a lot of money. I wouldn’t have been able to have that confidence if it hadn’t been being around a sort of iconoclastic investor like Bobby Ludwig.

Ben Graham, the legendary investor and founder of CFA Institute, warned about value traps. As CEO of Hermitage Capital, how did you come up with the incredibly prescient thesis that 1990s Russia was not a value trap?

When we discovered Russia, it was trading at a 99.7% because it was horrible. If there was no catalyst to improve it, then it wouldn’t matter how discounted it was. We’ve seen a lot of situations around the world that are horrible and stay horrible, or situations that are horrible that get even worse.

The key is low value with some type of catalyst for improvement. In a certain way, my career has been a testament to how that works and a testament to how it doesn’t work because Russia went from horrible to bad, and my portfolio, over a relatively short period of time, went up 40 times.

Reverse logic is also true. When things go from bad back to horrible, you can see equally dramatic drops. It’s really all about valuation and about some type of improvement happening at the same time.

Your ability to survive one of these reversals in 1998 holds great lessons for investors. The market crash followed the Russian government debt default, which led to the collapse of the all-star–led hedge fund Long-Term Capital Management (LTCM). How did you manage to persuade your investors to stay the course en route to that 40-times return?

I would not attribute it to anything good that I did, but more to how extreme the situation was. If you’re running an investment fund, let’s say you’re running an emerging markets fund and you lose your clients 25% of their money, there’s a very high probability that they’re going to throw in the towel, redeem. and say they’ve had enough pain.

If you’re running a Russia fund like I was, and suddenly suffer 90% drawdown, of course nobody is happy with you, but at that point, they think, “Well, maybe there’s a chance that . . . It’s gone down so much, I better just stick it out to see if I can get some type of recovery.”

I would argue that most of my clients stayed with me not out of any type of loyalty, but because we had gone down so far, they thought that there was at least a chance that it could bounce back.

A key to gaining and keeping investors is having the ability to tell a story. You are renowned for the visual way you break down and simplify complex narratives. How do you do it?

Probably one of the greatest training programs I ever went on was my first job out of business school, working at the Boston Consulting Group. The reason they were so useful and great, and it’s been useful and great not just in investing but in everything else in my life, is that one of the things that management consultants are paid to do by their clients is to take highly complex situations, simplify them, and then put them into a PowerPoint presentation.

I learned how to do that in my first two years in Boston Consulting Group, and then when I went into Salomon Brothers and as an investor after Salomon Brothers, I took those skills with me.

What was interesting is that almost nobody else in the financial world had those skills. I was able and I’m still able to take complicated stories and put them into a relatively clear, visually understandable, and repeatable PowerPoint presentation, and that’s often all people need.

The interesting thing is that a lot of times people are taught in life that you have to use jargon because you learn jargon, and therefore you should use financial jargon or any other type of jargon to show how professional you are.

What I learned is that you do just the opposite. You take anything that’s complicated and you try to get rid of any type of jargon, even if you’re talking to people who know the jargon, because everybody appreciates just understanding a simple, clear story.

Activism and corporate governance became key to Hermitage Capital’s investment approach after 1998. What drove this change?

When I first got involved in Russia, it was all about value. It was all about the relative valuations and how extremely low they were.

However, when I started to have large positions in big Russian companies, we discovered that the low valuations in many cases were justified because even if you owned your share of the company, you didn’t really have a share of the profits because the profits were often being stolen by the majority shareholders, who were oligarchs.

The situation got to be so extreme, and particularly in 1998, after the Russian government defaulted and devalued, and the stock market went down 90%. We basically couldn’t have survived as investors if we didn’t stop some of the stealing that was going on at these companies.

Like I said, being an activist investor is a higher return form of investing than being a value investor. I basically came to the conclusion that I wasn’t going to be in business if we didn’t get active, and it was a matter of survival as opposed to good investment strategy.

Once I became an activist investor, then a whole new set of challenges came in because being an activist in Russia meant trying to stop the corrupt oligarchs from stealing money. Those people who were stealing money were not happy with anyone trying to stop them because that money they felt entitled to.

There were lots of physical danger and other types of dangers going after people who were stealing money. Those dangers eventually materialized and caused me terrible problems when I was expelled from the country and the whole Magnitsky story began.

How did your approach to risk management change after adopting an activist stance?

Risk management approach: The way I viewed it at the time, sure enough proved to be completely wrong.

Context is important — my portfolio just went down 90%. I was trying to save the last 10 cents on the dollar. The way I viewed the risk/reward was that the risk was that I lost the last 10 cents on the dollar, and the reward was that it would go back up.

I always thought that it was just a purely financial risk. I didn’t understand the risk went far beyond that, and of course that was a crucial error in my judgment.

At a macroeconomic level, emerging markets investment strategists tend to focus on the sovereign debt ratios, on the currency exchange rates, the oil prices. What is your approach?

What I would say first of all is that the thing that nobody seems to spend any time on and the thing that’s so dramatically important is none of the normal metrics that you would look at are important without looking first at the rule of law and property rights.

Everybody I know, they look at growth rates. They look at GDP issues. They look at indebtedness. They look at currency valuations. None of them look at what happens if something good happens in your company and then somebody tries to take it away from you. What is your recourse?

Everybody seems to undervalue that issue. I would argue, from my experience over decades investing, that the rule of law is paramount, is the crux of any investment strategy. A country that doesn’t have some semblance of rule of law is effectively un-investable.

Any advice for investors considering putting emerging markets in their portfolios?

I think that it’s all a function of how much you want to put at risk. One of the things that I would say is that we’re all a little bit misled by the long‑term success of US equity markets over hundreds of years.

The idea is if you look at the US equity market, it has always gone up. Maybe you pick a bad-performing time, but it’s higher now than it ever has been. However, that is an unusual situation.

If you look in emerging markets, what you’ll see in many cases, they just go up and down and up and down, and unless you can time it properly, you can’t just put it away, forget about it, and just believe in the future of equity markets.

As a result, I think that people have to be very much focused on exits and timing their exits in emerging markets, because that will make all the difference between a highly profitable investment and a total disaster.

The United States has contributed a great deal to global uncertainty recently. How do you incorporate this and other developed market sources of market volatility into your investment philosophy?

I think as of now we’re are in a whole new paradigm because of Trump, who’s created all sorts of uncertainties about government shutdowns, and trade wars. Also, the independence of the US Federal Reserve Bank, which was never put in question before.

You add on top of that issues like Brexit and other things, and you end up with a situation where the places that we took for granted as being the anchors of stability are now potentially the causes of instability, and that’s a very new and uncharted dynamic of how to think about financial markets.

Large pension funds — if you were to advise them on portfolio allocations — should they be incorporating this new source of geopolitical risk?

If you look at the market cap of the world, the places that make up the largest part of the market cap are in the United States and Western Europe, and they deserve to be because those are the places that have the rule of law and property rights, etc.

Now, we’re in a situation where lots of stuff can happen that was unheard of before, and there’s no way of sidestepping it. It’s not like you can find some other place to invest that doesn’t have these issues. Everything is connected to everything, so we’re all in this together now [Laughs].

If the trade war leads to a spike in inflation, and that leads to a spike in interest rates, then markets can really go down a lot, which I don’t think anyone wants to happen. That’s one of the possible scenarios that could come out of this situation now.

Trade wars are just one type of non-financial risk. What are your other concerns?

There’s a lot [Laughs]. I think that we’re all watching China’s environment. At what interest rate do things start to crack? Do these trade wars get worse? If so, what does that do to inflation and interest rates?

Probably the most worrying thing is we’re entering an era of potential military conflicts. Tensions between sovereign states may result in a huge unexpected pressure on the valuation of financial assets.

C‑Suite Talks readers, especially in the interesting times we are living in right now, want to learn from the best minds in the investment management profession. Knowing what you know now, what advice would you give to your younger self?

That’s very easy. I would have never gone to Russia in the first place. I graduated with an MBA from Stanford. If I could have stayed out in California, got involved in the world of technology, I might have been even more financially successful with much less risk.

Bill Browder, thank you for your insights and advice. I look forward to hearing about these themes and more during your address at the SALT Conference in Las Vegas in May 2019.

Wonderful. Thank you very much.


Paul Kovarsky, CFA


Investing Lessons from Bill Browder


Unless you’ve been living at the bottom of a well these past few years, you’re familiar with the remarkable story of Bill Browder, an American-born hedge fund manager whose adventures in the murky world of Russian business have been splashed across the front pages of the planet’s newspapers and whose voice is by now familiar to cable television watchers and podcast listeners.

To wit, his persecution at the hands of Russian “law enforcement” authorities and their murder of one of his attorneys, Sergei Magnitsky, eventually evolved into Browder’s sponsorship of the Magnitsky Act, a major flash point of US-Russian relations.

Part of Browder’s allure is that he is a rara avis, the grandson of the leader of the American Communist Party and son and nephew of three world-class mathematicians. As he relates in his memoir, Red Notice, he seethed with rebellion against his family’s ideological and intellectual expectations: “Toward the end of high school, it hit me. I would put on a suit and tie and become a capitalist. Nothing would piss my family off more than that.” The one thing Browder left out of his account is just where he learned to spin a story: Had he not succeeded at finance, he would easily have had a career as a novelist.

Browder has given the world a tour through both the miasma of corruption that is today’s Russia, and through the intricacies of the US legislative process. Not many, after all, have beaten both the Russian financial mafia and government at their own brutal games or almost single-handedly pushed a controversial piece of legislation through congress and a reluctant president. His remarkable personal voyage particularly commends itself to the financial analyst, for tucked inside his memoir is the story of how he pulled off one of the greatest investment coups of all time, and what that has to teach today’s practitioner.

Browder, it turns out, inadvertently followed in the footsteps of Benjamin Graham, John Templeton, and David Swensen. All three made their mark not in the best-lit chambers of the world’s securities markets, but rather in their undiscovered nooks. Graham didn’t have instant online access to the balance sheets of thousands of companies. In that era, such data could be a closely kept secret that not infrequently required getting on a train to a distant city and sweet talking an executive’s secretary. Perhaps his greatest triumph came when he found, before any other outside shareholder, Northern Pipe Line’s huge cash hoard and managed its deft disgorgement,

How many US investors do you imagine traveled to Japan before World War II looking for stock bargains? Templeton did, and the valuations he found popped his eyes out. Alas, in those days the Japanese authorities didn’t look kindly on Americans shopping for company shares, and he came back home empty-handed. Soon thereafter he noticed that small-cap companies — which back then simply meant any company selling for less than a dollar per share — sported attractive valuations. He decided to purchase 100 names, and since in those days such shares generally traded by appointment, this meant calling in some favors. Within four years, he had quadrupled his money. After the war, he returned to Japan. Foreigners were now allowed to invest, and he hoovered up bargains that yielded high returns for his funds’ shareholders.

Swensen similarly broke new ground in the alternatives arena, which he described in his nonpareil Pioneering Portfolio Management. Alas, all too many focused on the last two words in that title, not realizing that the most important word was the first. Most simply parroted Swensen’s alternative-rich asset allocation and failed to realize that the trick was getting to it ahead of anyone else.

In short, Graham, Templeton, and Swensen succeeded by arriving early at the banquet table, loading up on prime rib and lobster tail, and leaving the fried chicken and casseroles for those who followed.

Browder’s career did not have an auspicious start. His youthful rebellion prominently featured mediocre academic performance. He barely gained admission to the University of Colorado, a notorious party school where he caroused until one of his fraternity brothers was jailed for robbing a bank to support his cocaine addiction. At this point, he buckled down, upped his grades, and transferred to the University of Chicago.

Upon graduation, his CV still didn’t compare with those of the hordes of competitors from Harvard and Stanford. How to distinguish himself? As the grandson of Earl Browder, of course, with supposed expertise and contacts in the Wild East of newly ex-communist countries.

His first heartbreaking gig in Eastern Europe with the Boston Consulting Group involved a flailing Polish bus manufacturer that could only be saved by firing almost all its employees, which devastated the small town he had been stationed in. One morning at breakfast, he noticed his translator reading an article that prominently featured a table of numbers. Since he didn’t speak Polish, he asked his translator what the figures represented: the financials of newly privatizing companies. One entry, $160 million, turned out to be the profits of a particular company. The next, $80 million, was its market capitalization. Bingo: “Isn’t this exactly what I went to business school for?”

Browder rapidly cycled through positions with Maxwell Communications just in time for its scandal-ridden blowup to obliterate his résumé, and then with Salomon Brothers, whose recent Treasury Auction scandal made it the only place where he could find work. With each posting to the former Eastern Bloc, he stumbled across ridiculously priced assets: in one case, a Russian fishing company selling for 0.5% the value of its trawlers. What was more, the Russian voucher system put a large block of former state-owned enterprises on the market at similarly absurd prices. Not coincidentally, his success attracted the attention of Templeton, who arranged to meet the wunderkind.

Frustrated with bureaucratic delays at Salomon, with the backing of the legendary Edmond Safra, he established the Hermitage Fund. Browder soon found he had competition from Russia’s “oligarchs,” well-connected ex-communist officials who grew fabulously rich by bypassing the public voucher system to scoop up assets nearly for free. At this point, his account morphs into a geopolitical thriller that would do John le Carré or Robert Ludlum proud, and whose cliff-hanging financial ending I will not spoil, except to note that the Russian authorities, tired of his exposés of corrupt securities procedures and outright theft, finally expelled him in 2005.

After frantic legal and diplomatic efforts, it dawned on him that he wasn’t going back to Russia any time soon, and he lamented that “I couldn’t imagine returning to America to compete against thousands of people just like me.”

Exactly. Browder’s message to security analysts is stark: The truly outstanding practitioner is a solitary creature who works in a depopulated landscape, where they just might stumble across real opportunity.

William J. Bernstein


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