Investing in Stock Exchanges


So we love the monopoly stock exchanges,
for example the Chicago Mercantile Exchange, Deutsche Börse, the Hong Kong Stock Exchange and the Japanese Stock Exchange. If I can use the
Chicago Mercantile Exchange and if I can abbreviate with CME. CME has three
main businesses. 1. They do futures contracts which is effectively just
volumes on oil price. 2. They do futures – again – volumes on interest rates,
and then 3. They do volumes on volatility. So when you sit back here you
say, volatility in the market at the moment is at all-time lows. Why is it at
all-time lows? Because the Fed is keeping interest rates low and they’re not changing their balance sheet. So as a result, when volatility is low then their volumes collapse. If you look at interest rates, interest rates are at near all-time
lows. So again, what does that mean for their business? It means their volumes
for the interest rate products collapse, and then if I go back to the oil
business, the oil business has been bouncing
around as oil prices have averaged a $50 oil price for a while. So as an owner and a common sense business person, we sit back here and we
say, it’s a monopoly asset which we know means it has pricing power longer term. They have a management team that is focused on getting costs out of
the business because they do not know when the volumes in their interest rate
products and their volatility products are going to ramp back up. Then at the same time, the management team is saying – because we’re in a bit of
a trough with our volumes all of the free cash flow will be coming back to
you as the owner via a nice dividend yield. So we sit back here and we say, as long-term owners, one day interest rates will go up one day volatility will increase, but we’re getting paid to wait
with a nice dividend yield to wait for these occurrences to happen. And we know because it’s a monopoly, that when volumes do come back
they’ll have pricing power, which will then be able to flow through to us as
share owners of the business. We take a common-sense businesspersons’
approach to buying assets. We value the assets like a private equity manager
would so yes, we are contrarian as our businesses are depressed when we’re
buying them, but we focus on unique quality assets that produce solid free
cash flow and have management’s interests aligned. We complement the other fund managers well because we are so different.

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