“Own the producers”: the theory and practice of Kiril Sokoloff

Legendary investor Kiril Sokoloff shares his core insights with Opto Sessions. Ranging from his own theory of thematic investing to broad historical analysis, Sokoloff highlights which themes will predominate as the world enters a period of profound geopolitical change, and – perhaps – instability.

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No introduction needed

Kiril Sokoloff is widely considered to be one of the greatest investors of our time. Renowned as an original thinker and a ground-breaking strategist, in his more than 40-year career he has been ahead of the curve on every major economic and technological shift.

Sokoloff is perhaps most celebrated as a trailblazer of thematic investing. He believes that part of the success of this approach is that, “many times, a theme is investing in a solution to an economic problem”. Recessions may cycle through, but “the economic problem isn’t going to go away”.
 
Sokoloff has been advancing the field of thematic investing since he founded the company 13D Research back in 1983. Its name came from the Schedule 13D form, which must be submitted to the US Securities and Exchange Commission by anyone who buys more than 5% of equity shares in a public company. The 13D tells you both what an investor has bought and how much they spent, as well as their average purchase price, which, Sokoloff cheerfully observes, “it is wonderful to know”. 

Moving forward, Sokoloff was one of the first to appreciate the great opportunity represented by China. He co-founded the first pure Asian hedge fund in 1993, at a time when the Hang Seng Index rose from $3,000 in 1990 to $12,000 three years later. Subsequent achievements included investing in the Internet and ecommerce before the dot.com crash.

Signals from the universe

In terms of his approach to investing, Sokoloff says that, typically, “I’ll see something that is miniscule and a lightbulb goes off.” For example, in 1988 he read a short paragraph about mobile phone systems, and suddenly realised the transformative potential of modern telecoms. 

“Study financial history. Stay humble.”

But he also tries to keep things simple. For example, in his approach to electric vehicles he focuses on key metals. “There's a huge bottleneck in copper, lithium, cobalt and nickel. So it's the bottlenecks. I want to invest in the bottlenecks.”

It is important to keep a close eye on any anomalies – anything which doesn’t seem to be making economic sense. Another revealing approach is to try and identify the key driver of the whole cycle. Oil prices, for example, were at the root of global inflation for decades.

“The universe is giving you the signals”, he says – it is just a question of connecting the dots. 

Asked to sum up his broad philosophically, Solokoff is typically incisive: “Study financial history. Stay humble. And remember that a rising market is a financial genius, and any time you start to feel really, really smart, it's just about the time you're going to make a great mistake.” 

China is the future 

Sokoloff believes that we are currently in a moment of wealth distribution, after 40 years of wealth creation. There are global ramifications of this. On the one hand, there are labour shortages connected to demographic shifts, which is a very inflationary situation. 

On the other hand, he says, “the big elephant in the room… is that power has shifted from consumers to producers”. Going forward, it is the countries that produce – among them, of course, China – that are going to be the winners in “a new world order of massive geopolitical consequences”. “This is China’s time”, after being tied down by 5,000 years of history. “There is a dynamism, and a drive, and an ambition” among the country’s people. 

In short, “I want to be on the producers’ side”, Sokoloff says: “I want to own the producers.”

The consequences of this new world order will be manifold. But, in the immediate future, he says, deflation is not a likely outcome. 

“What we are going to have is a secular inflation, and we have to invest based on that. And we have to look for real rate of return after inflation, which is going to be very challenging for most people who've never done it.”

Negotiating a global shift

In terms of themes that Sokoloff and 13D anticipate becoming increasingly central, water is a major one. “The wars of the future will definitely be over water”, Sokoloff predicts, and water utilities thus offer a great long-term investment opportunity.  

Another theme is related to supply chains. Covid-19 accelerated a trend of reshoring. But Sokoloff thinks that this will be extremely inflationary. In addition, people don’t seem to appreciate how expensive or time-consuming it will prove, “so it remains to be seen how this will unfold”. 

“The race between China and the US is over who will dominate the technologies of the future.”

Another important, related area is semiconductors, “the building block of the technology of the future”. Now, “every country wants to be self-sufficient in terms of semiconductors”. Once again, however, it is the producers who will set the tone on this. The ever-increasing centrality of tech both responds to and advances a profound geopolitical realignment.   

In this sense, whoever dominates tech dominates the world: “The race between China and the US is over who will dominate the technologies of the future.”

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