Good Investing Talks - Why do you like Cake Box Holdings PLC, Sam Hollanders?

Episode Date: June 6, 2024

It was our pleasure to welcome Sam Hollanders of Chess Capital (https://www.chesscapital.lu/) as a first-time guest on Good Investing Talks!

All our partners are entrepreneurs or have a really entrepreneurial mindset. And so they don't have the time to do all the research and the investment. But they also like that we are in those smaller companies. They can understand that they feel connected to. So I think that's the differentiator for us. We have zero management fee structure on performance fee, like the Buffett Partnerships, 0625. And I think that's also something that's pretty fair to our partners.

When they make money, they'll be happy to pay us. And if we don't execute like we should, then we don't get paid. It's cakebox. It's also a company I think that's misunderstood. They had accounting issues. And it wasn't really accounting issues. Everyone thinks it's accounting issues. It's just.

Dear viewers of Good Investing Talks, it's great to have you back at the podcast. And it's great to welcome Sam Holland. for the first time. Hi, Sam. Hi. Hi, Tillman. Great to be here. Sam, who are you? I'm pretty straightforward. I'm a family man. I have a wife, three lovely daughters, and I'm a value investor. So that's the short version. I should elaborate on that. I didn't start my career off as an investor, but as an entrepreneur, we own Photoshop's with the family, first my father and then my sister and I took over. And I started investing because of some extra classes I took to have enough knowledge about management. And there I had a professor who compared a great

Belgian company to one that went bankrupt due to fraud. And when he made that comparison, I thought, well, this is something I want to do. This is something I really like. And that was in 1999. So just before the dot-com crisis. And then in the dot-com crisis, my father lost a lot of money on the stock market. And that's when I decided to do all the investing myself. And then I started reading about Buffett, Munger, Philip Fisher.

I tried trend following and then other types of investing. But it really clicked for me when I read the little book that beats the market by Joel Greenland. I thought it was so easy to just buy good companies at great price and having the sliding scale as well. So not only cheap companies and not only quality companies, but it is a sliding scale. What you pay is that really clicked for me. And then in 2008, I made more money in the stock market than with the Photoshop's. And that's when I decided to go full time in investing. And in 2011, I started investment newsletter. I wrote that for, I'm still writing it, by the way,

but I wrote that for almost a decade until I decided I want to step up and start a fund. And I wrote in the newsletter that I want to start a fund and I didn't want to do it alone. So I wrote that and half an hour later, my current partner, Joel, called me and said, well, let's talk about this. I just sold my company and I don't like. how big banks invest. I want to have more skin in the game. I want to invest like an entrepreneur.

And then we got together, met a few times. And after three meetings, we jumped. We started a fund that was in 2020, just during full corona. So that was not as easy as expected. And then last year, we transferred from a compartment in a fund to our own structure in Luxembourg. what does the fund that's under umbrella of chess capital stand for or what does chess capital stand for um just capital is is value investing mostly small midcaps um family owned is also pretty important for us so not only family owned with strategic ownership um is a big focus um we do not invest in emerging markets

but we don't like to limit ourselves regionally. So at the moment, we are pretty heavy invested in the UK, in Scandinavian countries, but we also. Also kind of emerging markets, sorry. I've lost too much money in some UK stocks. I'm a bit better. It's the AEM market is a pretty tough market. Yeah, certainly since breakfast,

but I think that's where the opportunities lie now. So it's easier there to find good opportunities, good companies that add really great prices at the moment. So, yeah, that's just, yeah, emerging markets. No, emerging markets, I mean Poland. If you see Poland, they have great companies as well. But the legal structure is still pretty different. So that's one country we don't invest in, for example.

So that's what we call emerging. Why did you pick chess as an inspiration for your partnership? That's double. my partner joel was a pretty great chess player in his youth he was a in his yeah i don't know his ranking but he was pretty good and he also had a non-profit organization that was called go for grandmaster and they were educating young people i think being ages of 12 to 16 and they wanted to produce the first grandmaster in belgium so they did so i think about two years ago was finalized. So that's the connection for him with chess. And my connection with chess was in

my investment newsletter. I needed a way to rank stocks because I used the sliding scale of Joel Green, but going from really almost net net stocks to great quality companies. And I needed a way to rank them. So the really great companies are the queens. And then all the way down to the Ponds, the turnaround stories that if they reach the end of the board that can turn into Queens. So, and then the rogue bishop are in between. So that was the connection for me and then Joelle. And then it was just too easy to pick that name because investing is also kind of like

a strategic, a strategic game. Coming back to the family business, the Photoshop business you did own, how did it help you to become better as an investor? I think we look more at both Joel and I, we look at the business. We look at the managers, the culture of the business more. I think then people just straight out of school, I think they look more at the numbers. That is the feeling I have. I don't know because I didn't come out of school this way.

But for us, a stock is a business. And all investors say that. But I think we have that more in our. core than other because we were entrepreneurs first as buffett said if being in an investor made me a better entrepreneur and being an entrepreneur made me a better investor so i think that that's true that applies to us as well we weren't formed with the efficient market hypothesis or anything else we just look at the companies it's easy to keep a clear head to that way you were in the mess that's called making a business where things blow up from time

the time. Quite normal. Yeah. And for me, with the Photoshop's, we had the digital uprising on the photos. So in a photo business, you didn't earn anything selling equipment. It was ridiculous margins of one and a half to three percent. We had big Dutch companies, big German companies entering our markets. The margins were gone. But you earned on the printing of the photos. So I learned in that the disruption that can happen in businesses i learned that early on and that you need to move that you need to be flexible if you look at microsoft they almost had to reinvent themselves they had their base of office but they had to reinvent themselves to become the company they are today apple as well from computers they still have computers but they're the company they are now because

of the iPhone it's also reinvention and that's something i learned early on as well. And for some reason, I don't know why, but Jewell was also in telecom. So they were specialized in equipment for hospitals. But yeah, also there, it's the constant disruption. That's why you won't see us invest in high growth stocks or anything because we learned the hard way sometimes that disruption is fast and very easy to be there. So it's also something we learned as entrepreneurs coming back to the fund what is your why for starting a fund that's actually a pretty difficult question for me the moment I wrote it in the newsletter was it was a moment of frustration I always have the sliding the sliding stocks of the real quality companies

and then the ponds that were there, the net nets, the ones, the turnarounds, the one that easily go bankrupt. And at some point, I just received an email from a reader that had invested way too much of his money in one of those riskier stocks and not in the others. And he was mad at me because I suggested that stock, even it was for only 1% of the portfolio. And at that point, I was up that year about 18%. And he lost money with the same stocks in his portfolio just because of the capital allocation. So that was a frustration that I wrote off in the newsletter.

And that was actually the start of the fund. The rest is more, I think, when you have the fund and also the book I wrote, you are taken more seriously by other investors. So it's easier to communicate with other investors and network. That's also a big part for me. That's a nice thing to have as a fund investor. And for Joel, I know it was just his way. He didn't want to have the standard investments of the big banks.

He wanted to really act as an entrepreneur, but still not do private equity. So that's, we invest in sometimes pretty small companies on the 80 million euros market cap. And then you feel like you really can influence them. If you write them, you talk to the CFO, the CEO yourself. You don't have investor relations in between. And yeah, so the entrepreneurial aspect as well. So you found a customer problem. Like first you build a fan base with your newsletter.

Then you found a customer problem. and build the product to solve it. I think it's called entrepreneurship. Yeah. For me, it was if I write about it and people don't do what I write, that it's their choice. Of course, it's their choice. It's their portfolio.

They decide what they buy, what they don't buy. But for me, the, it was the problem that was solved was now I am responsible. I'm the sole responsible for the investment decisions, the allocation decisions. If something goes wrong and then the numbers are bad, which happened actually in 2022, it's my fault. And I can't blame anyone else. With your partnership, what kind of value do you want to bring to the marketplace, the marketplace of funds? Actually, we want, I think our biggest thing we do not different than anyone else. because others are doing it as well, but the most is the communication with our partners.

We send out a newsletter every quarter and we detail what stocks we bought, why we bought them, what stocks we sold and why we sold them. So pretty straightforward communication. That may be something I got from the newsletter writing before, but that's something I think it's really important. All our partners are entrepreneurs. or have a really entrepreneurial mindset. And so they don't have the time to do all the research and the investment,

but they also like that we are in those smaller companies. They can understand that they feel connected to. So I think that's the differentiator for us mainly. And then there's our cost structure as well. We have zero management fee structure, only performance fee, like the Buffett Partnerships, 0625. I think that's also something that's pretty fair to our partners. When they make money, they'll be happy to pay us.

And if we don't execute like we should, then we don't get paid. So that's also a thing that's differentiated. There aren't that many of us with zero management refunds. Why are you offering a fund solution that could be better than other offerings in the markets you're competing with? I don't think, yeah, better is such a difficult word. I don't think maybe it's better than others. It's just, it's different. It's us.

And then people that feel connected to us will like our fund more. As I said, it are all entrepreneurs that are in our fund. So I think that's the main differentiator. And that's, I don't want to call it better. It's just different. I think a lot of value investors, we're all doing the same thing. And one will focus on that stock and another one will focus on that stock. And one year, one will outperform than the other compared to the others because sometimes

the market decides to keep your stocks low. And then sometimes it decides that your stocks go up at different times. So yeah, I think value investing is maybe the factor that makes it better because I still believe that reversion to the mean is still the thing. we see a lot of passive investing and quality investing now growth investing was also with all the tech stocks i believe it's time now for a turnaround that the value will come up but yeah i don't think necessarily better but just different i think people will will understand if they read a partner letter for example on our website then they will understand what we do

why we do it what motivates us and i think uh that connection between us and and the partners is what makes it better because i think our partners understand what we do and why we do it and they will keep participating even in periods when the fund isn't performing as uh other maybe other funds so they won't get out at the worst time uh at the bottom and they don't come in at uh at the best time at the hide and that's why i think it's it's better because of the communication. But not necessarily investment-wise. I don't think we can differentiate with others.

It's just personal thing, I think. Adding to this, what is your competitive advantage as a fund manager? To private investors or other fund managers, because I think because it's just the two of us against other funds, we have a very fast investment approach. I'm primarily focused on the research and then I discuss everything with Joel and then we decide what to buy

that can be in one or two days sometimes, sometimes research go that fast sometimes it takes a few weeks but we don't have a committee that needs to decide it's just the two of us so I think not that we trade that much that isn't a factor but we can decide pretty fast and then also because we are small

we still have the opportunity to invest in those pretty small companies that the others overlook. And because we, as I say, we communicate a lot with our partners and actually even some have refused some investors because we didn't think they have the right mindset. we don't have that quarterly or monthly target to hit. They're okay with us. If we underperformed in 2022, they're okay with that. They know why. And that's the timing issue that a lot of fund managers have, that they need to perform or compete against others.

We don't feel that pressure. And if we feel that pressure, it's not coming from our limited partners. it's coming from ourselves. So I think that's also a very big competitive advantage that private investors also have. That's why I asked private or fund managers. Private investors don't need to perform against the benchmark each quarter as well. And we don't compare ourselves to a benchmark either. We have set ourselves a nominal goal of between 10 and 18 percent compounded annual growth

over a period of a decade and that's the target we need to hit so if the standards in poor or the euro stocks does better or worse yeah we don't really care we don't compare ourselves you already mentioned it a bit but what is the investment strategy of chess capital it's it's we have three segments in in our funds because we are in those pretty small stocks the liquidity isn't always that high And to be able to meet redemptions or inflow of capital, sometimes not at the right time. If the stock market was I like in 2021, we had a big inflow of capital. And then you need to place it somewhere.

And if you don't have good opportunities. And that's why we have a portion about 20, 25% of portfolio is in holding companies, like Exor, Investorabase or Finna. they provide the needed liquidity and they're also just great companies and we we were able to buy them at that a very opportune moment so that that was that's a part of the portfolio then we have the quality stocks we call them our core positions it's for the moment it's four of them they are the biggest positions in our fund they are between five and eight percent of the funds. That's the positions we always want to buy at a decent price. We don't overpay. We

don't pay for growth that might be. As I said, the disruption is so set in our brain that we're always pretty on the safe side with the margin of safety. But those core positions are our quality businesses and then we have what we call the value place. And those are leaning. two quality, but they can also be just cheap. For example, we bought Euronaf, the tanker company at around 6 euros, trading at half book value, sold them when they reached F-14, didn't go into trading war. The same with the retail real estate in retail, Weddlethaven in Holland. it was trading at 0.25 times book value and book value was too high but it was just ridiculous

so we bought it at 0.25 sold at half book value those are the value place but the value place range from that opportunity to also what sometimes others may call a quality place or companies that grow at 6, 7, 8% a year but then we still buy them when they're low and those are the ones we sell when they reach intrinsic value, the fair value, as opposed to the core positions, at the core positions we will keep longer. We need to have a premium, maybe 30, 40 percent above what we calculate as intrinsic value because we don't want to trade in and out of them a lot. A lot of the time with those really quality companies, you see that the stock market goes

up. Those companies get overvalued, but if you sell them, you never get a new opportunity to buy in them. And they increase their value from growing internally. So you never buy them cheaper when you solve. So that's the duality in our portfolio. So maybe you can call it the new Buffett after Charlie Munger and the old Buffett before Charlie Munger. We use the two approaches. So what kind of investments make you really passionate? So maybe you can go back in time. Remember one or two situations where you've been really passionate about an investment that could not stop thinking about it.

Ian went to your wife or to kids to tell them about, oh, I found this investment. Yeah. Well, the one I always tell the kids about are the, but that's a private investment that's actually not in the fund because it's even too small for the fund it's a small real estate company in Belgium and when I have three daughters so there's a lot of shopping and when we go to the not the shopping malls but the the high streets the streets in the cities and we pass one of those buildings that they own I always tell them that's

We own a piece of that. We own a piece of that. And that's something that I think is a very nice thing to do with your kids because then they realize, first of all, what I do. Because otherwise, when they were younger, they always thought I was playing games on the computer instead of reading and investing. So that helped. And yeah, that's something I'm passionate about as well, real estate investing.

That's something I got from my father. But then company was. advice. Well, one of the investments is in the photo business, smart photo. That one I've followed for a very long time. And that's just because we saw it, it almost go bankrupt and reinvent itself, going to personalized gift instead of photos and then and grow again. That's also the one I discuss a lot with the family because when we order gifts, like those coffee mucks with the photos on, I think they're great to have them here for my family. comes friends and family have their own mugs here with their own pictures on it so that's a fun thing then the one that I am passionate about because I think the world misunderstands it is also a very local company it's 10 miles from where I live the headquarters that's SIPF it's a palm oil company so I think palm oil is misunderstood everyone sees it as as The business that drove out the orangutans and other monkeys and other, always the bad part, yeah, cutting the forests.

What people don't see is that palm oil is much more efficient than soy or sunflower or anything else. So if we want to feed the whole world, we need to invest in palm oil, do it the right way, of course. CEPF is a company that does it the right way, locally engaging with the community, building schools for the community. So, yeah, that's something I'm passionate about as well because I think it's really misunderstood. I'm thinking of others in the past, the holding companies, I think, as well. But that's more not for the fund, but for private investors. I think a lot of private investors are now looking at passive investing, ETF investing.

And I think if you look at the holding companies like Investor Abbe, Exor, and Akramus van Arran in Belgium, if you put your money next to all those rich families, having the money to have the best employees for research and everything, I think it's very difficult to go wrong with that. So that's also one of the passions. That's also why they're in the funds for a small part, the holdings. They provide liquidity, but you also see that they just perform well. And then most recently, it's cakebox. It's also a company, I think, that's misunderstood.

They had accounting issues. And it wasn't really accounting issues. Everyone thinks it's accounting issues. It's just the founder and the CFO, the co-founders. They started with one cake box shop. It's egg-free cake. They're of the Hino community. but even not all hindus it's even a small part in the hindu community they don't eat eggs okay

let's talk about this a bit later i have to stop your passion for a second because we want to go deeper into cakebox a bit later and um maybe let's try to invert it what is the most boring investment framework or scheme you have in the fund but that works and we don't have that much passion about it but like think it's just a helpful thing that works for you wow um i always research the companies and and then they always have to um have to have to have something that that that that i like because uh i think the most boring is if for now the construction companies i think uh with with rents with inflation and and uh i don't mean rents uh Oh, wow, I'm looking for the word.

And then, yeah, interest rates, that's it. With interest rates going up, yeah, sometimes I space out in English. I don't know why. With the interest rates going up, you see that construction companies are hit very hard. You have construction companies that are now at half book value, or even 30% of book value. and if you see that there's still difficulties in housing in Germany. I know there's not sufficient housing or decent housing in UK as well. Sweden.

Yeah. And we bought three different construction companies, one in Belgium, one in UK and one in Sweden. The one in UK is the most solid one. The land bank is just there if they don't develop. because people can't afford it, then they develop in maybe two, three years, four years, five years. Yeah, we actually don't care. It's just now it's a waiting game. You bought them at such discounts that you just have to wait until either the interest rates come down or people can afford better housing again.

But the troubles we have, old housing that needs to be remodeled, old neighborhoods that need to be remodeled as well. you see them in the UK pretty much all housing blocks that are just bought up and redeveloped with new schools with new shops yeah that's something yeah that's maybe the most boring part because once you bought them it's just yeah now we have to wait and that's something you can't control interest interest rates so yeah hey turn on here it's great that you have made it that far into the video and i think it shows a certain passion for investing you're having If you want to dive deeper and go further down the rapid hole, you're invited to apply to my community Good Investing Plus. It's a place that's very helpful to people who are ambitious about investing.

It's helpful to investment talent as well as Experian Fund Managers. So if you're interested, please click on the link below. And now, without further ado, enjoy the conversation. What are reasons why you don't invest? We talked a lot about like the positive factors, but if you get to know a company, what makes you pass? If, yeah, if you don't understand it, that's always the easiest answer. For example, banks, I think banks are very difficult to analyze what's kept off book, what's on book. So that's something we pass on.

For the rest, it's high debt is also a no-go for us. As I said, we have the disruption ingrained in our minds. So we know that companies that have a lot of debt can go bankrupt the company without debt. It's very hard to go bankrupt. It still can, but it's very hard. So we want our companies to be flexible. And I think if you have too much debt, you can't be flexible. And then I think the highest no-go for a company is the management.

If you don't like or trust the management, yeah, I think that's most important factor. I can give an example if you want a very big example. I don't like. I never invested in Tesla because of Elon Musk. I think what he did with the 420, he said we have a buyer at 420 and there wasn't a buyer. And then he raised capital when stock price went high. I think that was such a non-trustworthy move that I didn't ever look at Tesla again as a company that could be bought. Yeah, that's maybe the highest profile profile one.

But yeah. So even if it becomes to be the best car manufacturer in the world, you won't see me buying it. I don't feel like I can trust him. What happens before you turn an idea into an investment? or what usually happens if yeah i read something about a company i i like i have different ways of finding companies one is reading a lot of course that's for for all investors then uh seeing what other investors do as well they have great new ideas let's look into them and then the others is screening just just the real basic screening uh putting factors in and then when when a company

comes out. The first thing I look at is the balance sheet. So as I said, that is a pretty high factor for us. I also think you can see in the balance sheet a lot more than people think. If you see a growth in book value, tangible book value, you know the company is earning money. And you know that it doesn't matter. It's reinvesting the money as well. You don't have to look at the profit and loss statement to see that the company is making money. So the balance sheet is first. for me. I like companies, industrial companies, companies with assets, something you can fall back on if needed to be. After that, it's of course the profit and loss and the cash flow statement. And if I like the numbers, then I look into the management. What have they done? Are their strategic owners? And so on. But that's, I already know what the business does because it has to get me interested. So, yeah, that's maybe first what does the business do, how does it make money, then the balance sheet, profit and loss statement, cash flows, and then management. And company culture as well. I think if we have such a luxury position these days that we don't, we don't

have to leave our home to get to know the company culture. You can find online, there are websites that rank companies, disgruntled employees that that put things online. You can learn a lot of other companies just from behind your computers. What is the aspect you spent the most time on in your research process? Then it's the business itself. What does it do? How does it make money? Who are the competitors?

Why is this company better or worse than its competitors? Where can it do? Maybe it can do better. Maybe it's an easy fix. And if it's trading very low, then a lot of, companies if you're really on that side of the aspect of value plays the real deep net nets then you know that there's something wrong with the company is this something you can see that's easily fixable that the management can fix so that's that's the business itself that's the first part

and then after that a good hard look at the numbers trying to look for the the so-called red flags Is there something wrong with the numbers? Are they manipulating earnings figures? Maybe a simple example of something that I don't like is if you see a company reporting numbers. And in the past, when they were growing, they were always reporting 9% growth, 10% growth. And at some point, the numbers aren't that great. And they just mention the number of the revenue. and no longer the rate at the growth or decline, that's something I think, then they're hiding

something. That's something I don't like to see in company presentations. I like to be the management to be straightforward and saying that, well, it is not as good as last year. That's why. If they made mistakes, I want them to earn those mistakes and say why. So that's the second part in the annual report, just reading through. won the first one of last year and then some past years as well.

Not starting backwards, but sometimes just going five years back, seeing what they said then, what were there, what was it thinking of growth back then? Did they execute on it? Did they, if not, do they come back to it in the next year and give us the reason why they didn't execute? I think that's the biggest part, the annual reports itself. You mentioned five years. Going back five years and comparing it to now,

what kind of research aspect do you now spend way more time than before? Then five years ago, it's maybe I think the management more. because the companies have the focus is a bit more on the smaller companies and family-owned companies and if you are in the family-owned companies and they own sometimes 50-51 percent they decide everything as a small investor even as a fund you will own maybe one percent of the company and you have to realize you don't have anything to say you can make suggestions but you don't have any influence. So focus on who they are is bigger than five years ago.

Five years ago was maybe more a quantitative approach, maybe more than numbers. So it's more from numbers to people to switch. But it's not that big a difference, but yeah, maybe just a bit more. So let's go from people to cake. Yeah. I promise to talk a bit more about. cake box one of your larger holdings and what kind of problems is cakebox solving as a business

they as as i said they produce egg-free cake so that that's their differentiator there's only one other company in in the UK doing the same thing a copy almost it's almost it's copy it's even using the same colors for their shops and they started off as two Hindus. A small part of the Hindu can't eat eggs because of their religion. And that's why they started the cakebox shops. They started to shop themselves, one. And then the CEO and the CFO both had one.

And then after it became a franchise. But they, yeah, it's just the egg-free cake. They found a way to still have good tasting cakes. I'm calling it good because when in Europe, the cake box wouldn't work in in i don't know uh germany's germany's um cakes or we have a lot of bakeries so it's hard to yeah so i think it's pretty good as well what i remember from from holidays but in belgium in france cakebox wouldn't work it just isn't tasty enough um but in the ukay the standards are different they yeah they

have maybe a different taste palette. I don't know. We try the cakes and they're okay, but they're not as good as we are used to. I will say it like that. Maybe that's better. But the egg-free cake, it was a real difficulty to make the sponge that is based on. That was the hard part to make without eggs. And they found a way to still make it and still have it tasty. So that's good for that part of the Hindu community. That's how it started, but now also Vee. are coming to their shops as well. So yeah, that's a real solution for them. And I think the way they do it is they baked the sponges in factories three points in UK.

Those go to the shops and then the shops make all the fresh ingredients on the whipped cream or fruit and all those things. So they found a way to do it fresh as well. well. Why did you find cakebox an interesting investment? And how do you want to make money with it? For now, the only money we make with it is the dividend. They have a pretty high dividend because it's franchise. They don't need that much money to reinvest. That's the way we have made the money for now. But we hope to make an exit sometime when they're valued at the correct price. I think it's undervalued now. And the reason they're undervaled is because they had, yeah, not accounting issues,

but they grew too fast. As I said, the CEO and the CFO at that time were both founders from the cakebox shops. They're there, especially the CEO is a real commercial guy. He wants to grow. He's a real entrepreneur. And they lost track of what was needed to have a listed company. And at some point, they just copied the old annual report. and partially put in the new numbers and forgot to erase lines of the old company reports

so that the numbers didn't add up, the R&S numbers, the one they filed at London Stock Exchange, they were correct, but the annual report wasn't. And that's, yeah, a lot of people got scared back then because there was a pastry shop in England as well that went bankrupt due to fraud. So they saw the same thing happening again, which wasn't. it grew too fast they couldn't cope they didn't have the control structures in place the the mansion wasn't sufficient enough the CFO got fired over it so that's now there's there was an interim CFO now there's a new CFO that has experience in franchise businesses

so the structure is now solid enough and they're still making a lot of cash yeah they're like it's it's just a cash machine so for now it's still the dividend I think it's five or six percent dividend yield but yeah it's hope for an exit um last summer river capital wanted to buy uh cake box uh river capital is a is an australian um mostly private equity also have a small part listed and they also own i think it's a cheesecake factory it's called in in australia and then yeah they wanted to buy a cake box at that uh 1 pound 60, 160 pence. Management refused.

And what we see now is that River Capital is buying, even at prices, higher than the 160 they offered before. So I think maybe a new offer could be coming. That's maybe a way as well to get paid. I hope it's not too soon because for now they're at 215 shops, cake box they say they can grow to 400 so i would like to have some of that growth as well before they exit the stock market but i see that as a real uh i think that that's at these prices uh that's not a problem for cakebox but it's almost all uh uk listed stocks and smaller companies they're so

cheap that they're going to be taking private i think uh yeah how do you make sure that it's not a art? You can never be 100% sure. We all remember Enron Wildcard. Even if big audit firms go over it, we're never 100% sure. But we could visit the shop. We saw that those franchisees were actually so enthusiastic. They called it life-changing to be a franchisee. They were very happy. to be there and then they said they were yeah almost like a family during corona was a difficult time they helped each other they could count on headquarters yeah so i think that's that's an important factor and then just just small tests kickbox has the the franchisees who have shops and then they also had kiosks in in supermarkets and if you went online you saw that there were

always good reviews about the shops and then the kiosks got bad food reviews because the cakes weren't refreshed enough. I'm going to say something. I don't know the exact hours, but let's say they put in the cakes at 11 o'clock and then if you got in the next day at 9 or 10 o'clock, you had the old cakes. They weren't taken out fast enough. So they were still. And then at up past 11, they were new.

when I saw those reviews, I messaged the company and saying them, well, there's a problem there. You need to fix that because you're getting bad reviews even for your franchisees for the kiosks because people say kegbox is cakebox. They don't care which franchisee or if it's a kiosk. And you get a response. You get a pretty fast response and you see them acting on it. The kiosks were better managed after that. Just by us as a small fund sending a mail to them.

So that's a small. If you get reaction and you get an immediate reaction and a detailed reaction, most of the time it's not a fraud. If it's a fraud, and I'm sad to say I have experienced the fraud in my past with private equity. There are triggers. The way they say things, the way they keep it more vague. They don't go into detail, or if they give details, then it's strange details. Wanting to, yeah, overthrow your thinking.

So that's maybe through experience. You're never to 100% sure, but I hope that through that experience, I learned enough to see when it's a red flag or not. And usually you can find it in the numbers as well in the annual reports. And now with the accounting issues, indeed, you could say, how can you be sure the way they reacted on it? And the numbers in the R&S report were correct. So if you had capital like you or Bloomberg terminal, you wouldn't even have noticed if you didn't read the annual report as well. Because the numbers were correct there, but not just the layout, the thing they give to the public was just made up wrong.

don't let the intern do your annual report it's not a good idea yeah i don't know if it was the intern he was also going through a divorce at the time the cfo back then and i think it was just too much and and maybe not not having uh not having the structure of interns and and subordinates to do the job as well just growing growing too fast what Could you have gotten potentially wrong in this investment? I think that if there's something wrong, then it's the growth. If they don't manage to get from those 215 to 400 jobs, then they're worth less than we think. But still we have enough margin of safety to still earn enough.

then it's not not yeah maybe a double from these a bit less than a double that maybe it's just 30 or 40 percent undervalued I think that's the biggest assumptions we could have from that's growth they don't manage to keep growing and what we don't want to see is them entering other countries as I said I don't think the cakes are good enough to enter Europe so if they want to enter Europe, I think a lot of money will be lost trying to gain market share that they will eventually have to abandon or step up their game. But I don't think, I don't see anyone in my neighborhood or in my family eating those cakes when we have a bakery next to it that, yeah, as the cakes we are used to, maybe it's just that. Maybe it's just that we're used to.

It doesn't match our taste. How do you think about the exit at this investment? For now, we just want to see it grow. And if they reach fair value, at a point where the growth is progressed far enough, let's say 300 or 350 franchisees, I think we will exit. because over that, the growth isn't dominant anymore. For now, it's growing and we don't think of the exit yet. If the price keeps at this point, I think we will be forced to exit because of private equity, taking it's public.

Not private, sorry. So it's not a real concern for us at the moment. Let's move to the last part of the interview about portfolio construction. So how do you think about portfolio construction? What is your general framework there? I already mentioned it earlier that we divided in three parts. So the holding companies is the capital buffer to see if we can do redemptions or to just part money when we say we don't have enough ideas. And after that, if it would be possible to have the whole portfolio, all quality companies

at decent prices, we don't invest more than 10% in a company at purchase. That's a rule we said for ourselves. It's not a legal rule. In the structure we have, we can have 30% in one company. but we don't want to invest that in the company so the core positions we typically buy about between 5 and 8% and then we think you just let them grow that's that's maybe a lazy way of capital allocation if a company performs well we are not going to to diminish the position just to have money taken out, we will just let it grow.

And that way we think winners will take care of the capital allocation itself. If your bad companies diminish in price, they will get lower percentage in your fund and the ones that perform well get a higher percentage of your fund just naturally. But we do make distinction, the core holdings between 5% and 8% in buying and for the the value place it's between two and a half to four percent that we buy originally but we have value plays now that are almost six percent of the portfolio that grew from from two and a half to six percent so we don't exit them as long as we think the the fair value isn't reached we see no need into diminishing positions just because of getting some money of the table as long

as we think it's undervalued, just let them grow. That's a pretty, yeah, maybe lazy way of capital allocation, but it has worked in the past, so I hope it will still work in the future. Are there any other factors you think about in portfolio constructions? Because like the quality of the cash flows, the differentiation between the cash flows, or? We do make sure that we don't, we have about, maybe 20 to 25 stocks in our portfolio.

So it isn't highly concentrated and it isn't diversified that much. We just think that that's the sweet spot we can manage. So that's something we also look at. If we go above that number, we will sell another company if we think we have found a better one, just to not have too many companies to worry about, actually. So that's also part of the construction of the portfolio. Then I think we don't want to have five automobile manufacturers.

They're all pretty undervalued. Stellantis, B&A, Mercedes. I think people are exaggerating what's coming to us. Maybe some are not. I think the Chinese manufacturers will come. It will hurt profits. But I think Stalantis, for example, is pretty decent in anticipating. They took a small position in the Chinese manufacturer as well.

They will do the distribution outside of China for that manufacturer. When we bought, it's more than a double. It's one of those that are often 2.5% to 6%. So I don't think it's a buy anymore. but I don't see it as a cell, but we don't want and Stellantis and BMW, for example. We will choose one. We don't want that big exposure. I said we had three construction companies as well, but those three construction companies together

make up five and a half percent of the portfolio. So we see them as one position, not three different companies, but mentally it's one position for us. So that's something we look at as well. So that not all, even if it's cheap, a whole sector can be cheap. We don't want to be too heavily weighted in that sector. We want to be diversified enough. I think we can do that with 20, 24, 25 companies. So yeah, not more. And you won't see us drop the low 15 companies, for example. I think that even if it are the best companies in the world. As I said, we still have that mindset of disruption. We don't want one portfolio hurting us that one company hurting us that bad. If you are in a business and you can't

see the disruption coming, then if you're not in the business, you won't see it coming as well. That's something we're really ingrained with. So that's why we want to diversification. starting with the Photoshop helps you here yeah exactly we covered a lot of ground in this interview Sam so for the end there's always a chance to add anything we haven't discussed or you want to go deeper into so is there anything to add um not not really just that i'm very looking forward to meeting you in real life in Omaha so that's uh if for the good investing community if if you're in home as well, I would be very happy to meet you all. I think that's one thing I'm most looking forward to this year.

It's my first time in Omaha, sadly. I had it planned last year. Couldn't go because of a move. Missed Charlie, but yeah. You will at least experience Warren and some of my bad drocks as well, hopefully. Great, happy to see you then in person in Omaha. And thank you very much to the audience, to listening to the interview. and thanks for coming on Sam.

Yeah, thank you. Bye-bye. Bye. I really hoped you enjoyed this conversation. If you did, please leave a like and a comment and for sure subscribe to my channel. Traditionally, I want to close this conversation with the disclaimer. So here you can find the disclaimer. It says, please do your own work.

This is no recommendation. What we are doing here is just a qualified talk that helps you but it's no recommendation. Please always do your own work. Thank you and hope to see you in the next episode. Bye-bye.