Good Investing Talks - How to evaluate management? A talk with Value Investor Robert Vinall

Episode Date: January 25, 2021

In this interview, Rob Vinall explains how he evaluates management.

Hello Rob, welcome back to our YouTube channel. Now we are doing our kitchen interview in English. Therefore, I would like to introduce yourself, ask to introduce yourself to our audience again. Who are you? Yeah, so my name is Rob. So I'm originally from the UK, but I've been living in Switzerland now for just over 15 years. I first moved here to work with a local family office, but I think after about two years in 2006, I set up RV Capital.

To begin with, it was purely a sort of a consultancy. I had the dream of running my own fund, but faced the chicken and egg problem that many of your viewers, I'm sure, will be familiar with, that without capital, it's difficult to start a fund, but without a fund, it's difficult to attract capital. So for the first two years, I was consulting for different family offices,

also a company, I think. And I had my sort of lucky break in 2008, where the Rentrop family very kindly supported me and started the business owner fund. So since 2008, my sole occupation has been managing the fund. You are now running the fund for 10 years? That's right, yeah. Congratulations to the anniversary.

Thank you. I'd rather be 10 years younger. How does a typical investment year of you look like? You mean how I kind of spend the time? more yeah so I guess in terms of how I spend my time you know there's a part of the activity or an important part of the activity which is sort of desk-based you know kind of reading reading annual reports primary information on companies making notes keep a journal on all of the companies which I which I follow I usually build a model not so much to

to value the company, but more just to make sure that I've understood the mechanics of the business. So that's the kind of the desk-based side of the research. And then the other side is, you know, I love to visit companies. I was saying it's very important for the investment process. So once I get to a certain point with the desk research, I think an idea is sufficiently interesting, I'll normally get on a train or an airplane to go and visit the company and, you know, kick the tires meet with the management and that kind of thing you're also going to foreign countries to explore them yeah so i'm completely opportunistic about where a company is based you know some

investors have a certain geographic focus like on a particular country or continent or whatever for me i'm completely indifferent to where a company is the certain characteristics i look for an investment which we can talk about but provided that they're there i'm indifferent whether a company is based in Germany, in America, in China, South Africa, whatever. You've grown your assets and the management from 10 to, I think, $220, $250 million with a great track record. Thank you. It's a very good record. And inflows.

How does this change in the amount of money you are taking care of changed you or not changed you? Well, I think it hasn't made a whole lot of difference so far. You know, there was, I've never really marketed the fund. And, you know, I think when the fund started back in 2008, there was probably around seven investors. And I would guess that on average, every year, probably roughly seven investors have joined the fund. And there hasn't really been much difference in that. Maybe there was slightly less joining in the earlier years, slightly more today. But it's, there's never been a big rush.

And, you know, even today, there's probably less than 100 investors. invested in the fund. So it started as a club and still today it is a club. And in terms of the capital, you know, I think the vast amount, the majority of the capital has come not from people investing new capital, but from the performance of the existing investments. You know, so I think in my first full year as a fund, you know, the fund started at around seven or eight million euros and had 20 or 30% performance. So, you know, 20% of 7 million is less than 2 million. Whereas today, based on 200 million, if I do, if I have a 20% return, you know, that's 40 million. So it makes quite a big difference, although the, you know, the percentages

are the same. So, you know, the capital has really come from from the performance rather than from people. And in terms of how I invest, I've always found my sweet spot to be companies which have a market cap of around about, you know, somewhere between one, two, three billion. I don't like it when companies are too small because it means either they have a very short track record or they have a long, very mediocre track record. And in the other hand, I'm not so keen if companies are too large, as oftentimes the opportunity for growth has gone to a certain extent, not in all cases, but oftentimes. So for me, the sweet spot has always been in the roundabout the sort of the one billion euro market cap space. And with the amount of capital I managed

today, there's no real restrictions. I thought there's no limiting through the amount of capital you currently have. Well, you know, the stock market is a kind of a pyramid with the largest companies at the top and then the further down pyramid you go, the more. companies, they are smaller. And so the more capital you have, obviously, the more you move towards the apex of the pyramid and the less opportunity there is. But, you know, I still find there's plenty of opportunity for me. And one advantage of being a little bit bigger today is, you know, I have very close relationships with a lot of the managers that I'm, or companies that I'm invested in. And by being a bigger part of the capital base for them, I can, you know, my voice

maybe has a little bit greater weight. And so I think that's definitely an advantage. How do you deal with mistakes? Yeah. So, you know, I've always, you know, before the fund started, you know, I learned investing not by working at a fund management company or for somebody else, but really by managing my own money. You know, so it all started in the early 2000s when there was a business.

the big sort of dot-com crash and I started with a very simple but effective methodology of buying a lot of their really beaten up companies which were trading below the net cash they had on their balance sheet. But since day one because I was managing my own money I was always trying to figure out on the one hand how to avoid active mistakes and then on the other hand how to do even better next within with future investments and that's kind of natural if it's if it's your own money, you know, you're not reporting to anybody else. You know, it's fairly obvious intuitive that you want to avoid mistakes and get better. And so it's always been a really big part of my methodology to make an investment

based on a certain investment hypothesis and then later to look back on that investment and see how it did and, you know, where I can do better the next time. And then, of course, you know, if I scoot forward to 2008, I started managing other people's money alongside my own but the structure remain the same it's just me doing it and my mentality is also the same as when it was just my own money of trying to kind of figure out how to permanently get better and I think it's quite easy to do that if you're not in a big corporate structure where there's people jostling for position maybe with the ambition to be you know to to occupy your your place or whatever you know so I think um

kind of the smaller setup that I have is much more conducive to, you know, to being open to learn from mistakes than maybe in a larger corporate setting. What do you define as mistakes? You know, so in the very early days I made some very obvious mistakes of commission. So I bought some companies based on a very simplistic balance sheet analysis, you know, trading at a big discount to book value and a handful of those. was, you know, went bankrupt or went to zero. And that was simply because I had not really gone beyond a balance sheet analysis in analyzing

the companies. So obviously, I was very keen to eliminate that type of mistake early on. And I think that's, I've achieved that to a certain extent. But the much more common type of mistake is actually missing out on good opportunities, so mistakes of omission. And a lot of my focus over the last 10 years and I talk about a lot of my letter is figuring out, okay, what can I do differently in the future to get better results. Then I would also link your letters below so that people can read about it.

In your letters, you also said you had a deficit in the investment thesis of some stocks, like Novel Nordisk or by due. Can you maybe tell more about this deficits you saw and why you sold the stocks? Yeah, so there were two investments which did reasonably well for me, but certainly didn't live up to my full expectations. So my investment hypothesis, and of course most of the time hypothesis don't work, but the hypothesis when I make an investment is always, you know, this is a wonderful company which is going to grow for a very long period of time and by remaining an owner of the company

I'm going to participate in that value creation. That's always the hypothesis. But of course, you know, things don't always work out that way. And, you know, in the case of Novo Nordisk, what I think I overlooked was that there was a too greater dependency on raising prices through achieving growth as opposed to, you know, helping people by selling more insulin. And that became clear to me over time. And, you know, that was the reason that I sold that company.

company. And in the case of Baidu, which is the kind of the Google of China, it's a search engine company, you know, my hypothesis there as well was that in the Baidu, you know, at the time the Chinese internet was a little bit behind the Western European internet, could effectively replicate the success Google had in the rest of the world in China. And although Baidu still does reasonably well as a business today, it's nothing, you know, it's a shadow of Google. It hasn't achieved anything like what Google has achieved. And the reason for that is that its search results are not particularly good. And in particular, they tend to be quite commercial.

So, for example, Baidu owns a food delivery platform or it used to own a food delivery platform. And so if you search for food delivery on Baidu, you would find its own services, but not the other ones. And that might make sense in the short term because obviously it generated traffic for its own service. To my mind, it doesn't make sense in the longer run because you have effectively a service that people don't trust. And if they don't trust it, they don't go to it with the same frequency and automatism that we would, for example, go to Google. And so when I realized that the search quality was not as good as I would hope, And that's when I basically made the decision to sell it. Looking at the Chinese Internet stocks,

when do you see the biggest quality in these stocks or in the companies? You know, the Chinese Internet is a fascinating place because it's kind of gone off in a very different direction to where the Western Internet has gone. And there's two very dominant players. One is Tencent, which has the dominant social network in China, which is called Weishin or WeChat. But it goes far beyond, for example, Facebook.

It's not just a social network. It has payment. It has all kinds of services, which people can use through its app. So it's a much more expansive company than Facebook is. And the other one is, of course, Alibaba, which is a kind of a mixture of Amazon and eBay and also has a very dominant payment service. So they're the two kind of very, very high.

high quality companies I would say and then in the second row there's lots of kind of niche companies covering certain verticals or service requirements so there's a lot of interesting companies that thank you for the insight and you let us have said that the acting people or the management became more and more important to you yeah way is that so yeah so you know when you start out as an investor obviously you know, you rightly place a lot of emphasis on your analytical ability. So you try and understand what a company does and analyze the various risks involved

in all of the different parts of its activity and inform an opinion on whether it's a good investment based on that analysis. But what I realized over time was that, although I do my best to be a diligent analyst, you know, a lot of the stuff you don't really see from the outside in a company. And what I kind of realized was where the companies were being run by people I liked and trust, I found the stuff I didn't see was generally positive. And in the companies where it was being run by people who I, you know, didn't trust or thought weren't particularly good people, a lot of the surprises were negative.

And so I kind of drew the conclusion from that that, that although it's important to be a diligent and thorough analyst, by far the most important aspect of an investment to get right is trusting the people who are running the company. So that's by far the most important factor that I look for when I'm analyzing a company as a potential investment. What makes the management good and trustable? You know, the vast majority of managers, it's very difficult to say one way and another. You know, so if you think about it as a sort of a bell curve or a distribution,

you know, you kind of, you have the vast majority in the middle of the bell curve and it's very difficult to say one way or on another, are they good, are they bad, you know, are they honest or are they dishonest? You know, I just don't know. I might have an opinion, but that opinion would most likely be as often wrong as right. And then you have kind of the two extremes of the bell curve. You have managers who are very obviously dishonest. misaligned unmotivated and of course you want to avoid those like the plague and then at the other at the other end of the bell club there's there's managers where it's completely obvious that the company constitutes their life's work they they have a passion for the business it's the

centre of their lives and of course it's those guys that that you really want to focus on and not get distracted too much by all the other stuff so what tools do you use to filter all these good managers and the people you trust and what psychology insights you maybe use yeah so you know i understand the question but i think um by far the most important factor is actually to decide for yourself that this is the most important factor you're looking for if you decide this is the thing you look for an investment then it completely changes your psychology about how you approach a company how you approach an analysis how you decide which which companies to to dive deeper on and which not to so i think by four

the most important thing is actually to decide for yourself really uh deeply that this is what you want to focus on and if if you do that i kind of think you know kind of 90 90 of the hard work is is actually um done but then of course you know your question is you know having decided this is what you want to focus on what are the you know the kind of the factors to look for and it's it's kind of quite obvious stuff, you know. So if you're looking for, um, if you're looking for a company where it constitutes the manager's life's work, then obviously in that person most likely has a very long, long period of time where they've worked at the company. They may very well be the founder or have started at a very, at a very early stage in their career. Um,

you know, so it's kind of very, very obvious stuff like that. You mentioned the positive surprises you have when you invest in a company with good management and people you can trust. One of your investments is Krenke. Do you have it in your fund for like from the beginning on? Yeah. Can you maybe tell a bit about the positive surprises you had there to give some more light in this? Yeah, absolutely. So I mean, there's a number of examples that occurred to me.

So, you know, Grinke is a, is a German company which does so-called small ticket IT leases. So if a company wants to buy, you know, say two or three laptops, maybe 5,000 euros, they have the choice of paying in cash, getting a bank loan or doing a leasing contract. In Greenco would be the company that they would hopefully go to if they decide to do a lease. And like all financial companies, Greenka was under a lot of pressure in the financial crisis back in 2008 and 2009. And whilst, you know, some companies went under in that period. Some companies trod water and some companies became.

much more valuable. And, you know, Greinke was definitely the case of a company which became much more valuable, just to pick one example. In early 2009, they bought a bank out of bankruptcy, a small Hamburg-based bank, paid almost nothing for it. And that gave them the possibility to immediately gain the ability to take in deposits. And over time, they used the bank as well for various other things including making loans and so that's something that i certainly would have predicted if you'd ask me if it was going to happen in 2007 but it's the type of positive surprise that does happen when you align yourself with you know managers who are thinking from the perspective of um from the perspective of an owner and there any other good examples

you can recommend to look at when whenever is good besides all you could It could be also besides your fund investments where you haven't invested in so great management. So an example of a characteristic or an example of a manager? Of a manager. Well, you know, there's so many. I mean, I haven't invested in Starbucks, but you know, I think Howard Schwartz is someone who clearly has an incredible passion for Starbucks and, you know, he has a deep love for the company. You know, love is not a word that you often find being used in financial circles,

but that's actually what you're really, what you're really looking for. it's kind of, you know, very obvious in him and, you know, there's a ton of other examples as well. For instance, like, for examples? Let me think, for sure. No, so, I mean, you know, I think I could almost mention any of my investments, but, you know, I'm invested in this company in Seattle called Trupanion, which does, pet insurance and there too it's you know they were set up by darrell rawlings um many years ago you know he's still today one of the largest shareholders he runs the business it's clearly the absolute center of his life i mean you know there's this when you look for it there's you find

quite a lot of it out there yeah thank you for the example for the management you're also talking about corporate or corporate culture what's your definition of this and what is a good culture for you. Yeah. So, you know, I think culture is incredibly important for companies. You know, the way culture works is, you know, it kind of provides a kind of guideline or sort of an operating manual for employees of what they should do when it's not clear what they should do. So, you know, for example, Amazon is a company where, you know, the customer service is really at the center of its culture. And so even if there's a specific, um, you know, case where an employee doesn't know what they should do, they can always refer back to the

company's values in its culture, okay, what would be the most customer-friendly to do? So it kind of provides them with a guide with guidelines on what to do. So culture is super important, you know, but where does culture come from? You know, culture ultimately comes from the values and the personality of the founder. And so that's why, you know, the kind of the leading people in a company and the culture I kind of view as almost quite interchangeable. Interesting. Maybe to sum up our discussion a bit controversial question.

Yeah. And one of your holdings, Facebook, where I have the gut feeling that I can't trust the management. Because, you know, there are a lot of stories about data privacy and things that are obviously in my eyes light. So how do you see Facebook from? the management perspective. No, I mean, you know, so I'm Facebook is one of my largest investments. So as you can imagine, I kind of disagree with that, with that. But, you know, I think, I think Mark Zuckerberg is one of the most sort of purpose and mission driven people I've

ever come across. If he's made a mistake, it's probably that he's been, he's believed too dogmatically in his vision. And, you know, the vision he had was of by connecting people, you would create this more open and better world, I guess. And, you know, that's been the guiding principle of the company since the very beginning. And, you know, I think it was a mission that a lot of people would have agreed with a few years ago. So when you had the Arab Spring and, you know, what appeared to be the case of sort of the smaller people being able to rise up against an oppressive regime through the tours of social media, people took a very kind of positive view on that openness.

and connectedness and then more recently over the last couple of years you know kind of the bad guys if you will have caught up and they've also figured out ways to use that openness and connectedness to you know to to spread hate to influence elections and and that kind of thing and that's obviously you know a terrible thing but i would argue very strongly that that's been a result of you know people effectively exploiting the mission of the company and the company was too slow to notice this was happening and it's received criticism for that quite correctly but you know i think their heart is in in the right place and it's really probably nobody would have guessed it would become such a large and powerful company in such a short space of time and how you know people who

believe very firmly in free speech would change their mind so quickly that certain types of speech should be actively censored and suppressed. So, you know, things have moved incredibly quickly. Society's values have changed quite quickly and the company has been sort of caught in the middle of that. But, you know, I don't doubt for a minute that, you know, Mark Zuckerberg's heart is kind of in the right place. In this case, you need also, you need to maybe change also culture on the company and you need also reflexity. How does reflexity play a role in your process? Yeah. I mean, in this case, I think the culture or the values of the company do have to adapt, right? Because people thought the more open and connected the world is, the better of the place it's going to be. And that belief has unfortunately been shown not to be 100% correct. I think it is largely correct, but it's not 100% correct. And those minority of cases where that openness leads to, you know, crime and interference with election and stuff, that's a price. society is not willing to pay for all the good stuff that's happened. So, you know,

the company has to adapt to that and adapt its values more towards kind of safety and privacy in addition to kind of connectedness. So it definitely requires some change and the company's doing that. But, you know, I think we're pretty lucky to have someone like Mark Zuckerberg there who clearly is no longer financially motivated. He's already, I think, sufficiently well, that that can be ruled out. So he really, I think, is trying to do the right thing. And we're lucky it's someone like that who's in this position,

such a position as opposed to someone with a very active political agenda, you know, trying to abuse that position of power that they're in. Thank you very much for this open and sadful interview. Thank you.