We Study Billionaires - The Investor’s Podcast Network - TIP582: Quality & Defensive Investing w/ Christian Billinger

Episode Date: October 13, 2023

Clay Finck is joined by Christian Billinger to discuss his quality investing philosophy. Christian is chairman of Billinger Förvaltnings AB, which invests in publicly listed equities. The firm seeks to generate attractive long-term total returns in real terms without employing financial leverage. Christian previously covered European equities for Cheyne Capital, Gartmore, and GAM in London. IN THIS EPISODE YOU’LL LEARN: 00:00 - Intro 01:39 - What quality investing is and why it works. 04:20 - How Christian assesses the reinvestment rate for a business and a company’s runway. 10:27 - Why soul in the game is more important than skin in the game. 12:58 - Qualities to look for to find operating managers with soul in the game. 19:16 - Why Christian prefers investing in family-owned public equities. 21:59 - Why he highly prioritizes removing the risk of losing money. 25:48 - What differentiates Christian’s current holdings from companies on his watchlist. 31:44 - What Christian learned from working with institutional investors. 41:36 - What stands out to Christian about Markel. 46:37 - Why Tom Gayner is an investor and business manager worth studying. 47:46 - How the investment outlook between Berkshire and Markel differ. 49:42 - Why Christian’s fund is heavily invested in the spirits industry, and what has led to the recent underperformance in 2023. Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join the exclusive TIP Mastermind Community to engage in meaningful stock investing discussions with Stig, Clay, and the other community members. Christian’s investment firm. Related Episode: WSB566: The Passionate Pursuit of Lifelong Learning w/ Gautam Baid or watch the video here. SPONSORS Support our free podcast by supporting our sponsors: River Toyota CI Financial Sun Life AFR The Bitcoin Way Industrious Briggs & Riley Meyka Public Vacasa American Express iFlex Stretch Studios Range Rover Fundrise USPS Shopify Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

You're listening to TIP. On today's episode, I'm joined by Christian Billinger. Christian is the chairman of Billinger for Ralstein's AB, which is a privately held company based out of Sweden that invests in publicly listed equities. The firm seeks to generate attractive long-term total returns in real terms without employing financial leverage. During this chat, Christian and I cover what quality investing is and why it works, why soul in the game is more important than skin in the game, why Christian prefers investing in

family-owned public equities, why removing the risk of losing money is essential for him, Christian's biggest lessons from working with institutional investors, why Tom Gaynor is an investor and business manager worth studying, Christian's thoughts on Markell as well as the spirits industry, and much more. Recently, I've personally embraced the quality investing approach when investing in public companies, and it was such a delight to have Christian on the show to chat about how he thinks about this approach and how it applies to his investments. With that, I hope you enjoy today's discussion with Christian Billinger. You are listening to The Investors Podcast, where we study the financial markets and read the

books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to the Investors Podcast. I'm your host, Clay Fink, and today I'm joined by Christian Billinger. Christian, welcome to the show. Thank you. Thank you for inviting me on. Let's just dive right in here, Christian. I think it'd be fair to say that you would characterize yourself as a quality investor. You know, you've been influenced by investors like Terry Smith, Tom Gaynor, who we'll be chatting about today and Guy Spear.

So to help frame this conversation, how about we just start with defining what that term quality investor means to you? That's a great question. I think in a way, quality investing is like any other type of investing in the real sense of the word, as in you're trying to pay less than what you're getting. So for me, it's more a question of, it's almost more a risk management framework than that sort of distinguishes quality investing for me and of course the types of businesses that you end up looking at. But I think the way I approach it is that quality investing for me means that I'm looking

to generate most of my performance from the underlying performance of the businesses that I'm invested in as opposed to the buying and the selling of securities. So I think in one sense, that makes quality investing different from many other types or schools or philosophies of investing where you're looking to buy something cheap. And once you've hopefully seen a re-rating, you try and sell it at a much higher sort of rating. And then you repeat that. Whereas ideally, I want to buy these businesses at a fair or better valuation. But most of the returns I anticipate to come from operating performance. So that's sort of how I approach it. So did you develop this sort of approach? I know we're also going to be talking about your

experience with institutions. So did you develop this sort of of approach from the beginning and it kind of fit your style or was it something that was learned over time? I think it's a bit of both. I always feel that if you want to have an investment philosophy and style that you're able to stick to over long periods of time, it needs to be something that comes sort of naturally that suits your temperament, your interests, your personality more broadly. So I think it certainly fits my personality and way of thinking about the world. But I think it's also based on having seen what works for other investors and what works for me or what has worked for me historically and equally what hasn't worked so well. So, you know, I think I've had

the most success early on in my career with owning good businesses. And there are other ways of generating very healthy returns over long timeframes. But I just find that quality investing is perhaps the most replicable and robust and sort of reliable way of doing it. And I think I've seen more people, you know, achieve very good long-term returns through what we call quality investing than I have in most other sort of disciplines. I do think that the upside or potential upside is probably, you can probably generate higher returns on the upside with some other ways of investing, but I'm so focused on capital preservation, first and foremost, and then secondly, the upside. So I think it just sort of suits our structure and my temperament and generally my outlook

on life. Oftentimes when I think about quality investing, I think about Chuck Akri's three-legged stool where you have quality management, great business, and great business being something that has high returns on capital, and then a runway to reinvest those earnings and have a runway for growth. So I wanted to tap into the ability to reinvest and that runway for growth. In the best case scenario, business is able to reinvest 100% of their cash flows at a high rate of return, but of course, we don't live in a perfect world, and it can be pretty difficult to find these businesses and be comfortable with them. So I'm curious. I'm curious if you could talk about the reinvestment rate a bit and what sort of reinvestment

rate you look for. If there's a threshold, maybe there's a lower end for companies that you own today. Yeah, that's a very important question with the reinvestment piece. So one, you know, I think important aspect of that is I think we often talk about reinvestment in terms of the cash flow statements. So in terms of the cap, you know, you might look at capex in relation to operating cash flows, for instance, what percentage of operating cash flows go back into maintenance and growth Well, especially growth CAPEX. And I think that is an important aspect of reinvestment. But I think equally, I think what's often perhaps not emphasized enough is the income statement, the reinvestment that's reflected in the income statement. So as in before you get to the operating cash flow, so there's a number of OPEX lines for any business, right?

And so much of the reinvestment happens there before you even get to the CAPEX line, if you will, in the cash flow statement. So I think that's really important to keep in mind because it's also less sort of visible. So we like to invest in companies that are often family control because they have what Tom Rousseau refers to as capacity to suffer and capacity to reinvest. And much of that happens in the income statement. So it may be a case of investing in product development or R&D or marketing or brand building or any of these things. And of course, much of that, you know, in some cases it depends on your accounting treatment,

whether you capitalize or not. But often that goes through the income statement. So I think that's an important aspect. it. We don't have a hard number in terms of, is it 50% reinvestment or 70 or 30 or, but we like to see businesses that ideally can reinvest at a high rate. But having said that, we also own a few companies that have seemingly very little reinvestments. If you look at a company like Kona or if you look at a company like KOLOPLAST, you know, their reinvestment rates are very low. So their dividend payout ratios are often close to 100%. And that's simply

because they can grow top line and earnings without reinvesting. So in a way, that's the ideal situation, isn't it, when you can grow earnings, but you're not having to deploy additional capital. So that means they can return plenty of cash trust as shareholders, but they can also grow the intrinsic value of the business. So I think there's all these sorts of nuances. I mean, I agree with the general notion that reinvestment is assuming you're generating returns in excess of the hurdle rate, which we would often consider to be 10% or well over 10%, then yes, we want to see high reinvestment rates, but there's so many other dimensions to it. So I think for us, the important thing is to see businesses that can grow, whether they require lots of additional capital or not.

I think that is a good point where you mentioned, you know, understanding what's flowing through the income statement rather than just looking at the cash flow statement. Yeah, I think that's a really, really good point. I wanted to also tap into assessing a runway, because if you're making some sort of estimate of where a company's heading in the future you need to assess, you know, how long they're going to be able to reinvest and what their market size is and how much they're going to be able to tap into that. So could you talk more about how you assess a runway of a business? I think partly or largely because of the kind of industries and companies were invested in, it clearly has become very fashionable in recent years to talk about total addressable

market. And I think they're important concepts and especially for some types of businesses and certainly in industries where that are highly fragmented. So you may be looking at a very large total addressable market and the argument would often be look, there's all these great businesses that have a sort of minute share of that market. So look at the growth runway. I think that's valid for some types of businesses. I think for the kinds of industries and businesses we're invested in, it's often less productive use of time, partly because the market share dynamics are so stable and the growth rates of these markets. So if you take elevators and escalators, or if you take spirits or if you take industrial gases, these are industries we're invested in.

And usually we have a pretty good idea with what the long-term growth rate has been historically and what we think will make some sort of guess about the future. I mean, we don't necessarily rely much on forecasts, but you need to have some idea whether it's a three or a five or a seven percent growth business. So I think we tend to look at the market growth rate and whether we think a business can or should grow a bit faster or slower than that. I think we tend to spend less time on the sort of total addressable market also because it's so difficult to estimate, right, if you're looking five or 10 years ahead.

So there's some of the things that I would look at when I try to determine the potential long-term sort of growth one way for a business. But I think in essence, I agree with you that whichever method you used to get to some estimate of the growth rate, sustainable growth rate, that's clearly one of the key variables and probably the key variable we look at. So, you know, you would look at the historical growth rate of the industry, of course, and then you're trying to argue for either why should we be growing a bit faster or slower going forward? How does it compare to peers? You might look at the usual sort of breakdown of volumes and pricing and premiumization and market share gains and losses.

But yeah, I think in a way, we choose to look at companies where it's easier to take a view on these things, if that makes sense. You know, it's the idea of the too hard pile. You know, it's easier, I think, to estimate the growth rate for the elevator and escalator industry or for the industrial gases industry than for many of many other more exciting industries. So you do put a high level of emphasis on business quality, but you're not going to overlook the quality of a management team as well. And skin in the game or high insider ownership is something that many investors look for in a management team. When I was preparing for this interview, one quote you had stuck out to me. You said, soul in the game is more important than skin in the game.

So I'd love for you to expand on this and talk about what you meant by soul in the game being more important than skin in the game. Yeah. I think it's an expression that I first heard or read in one of Nasim Taleb's books. And to me, skin in the game is really about financial incentives. So whether it's equity ownership or options or bonuses or whatever you can think of. So soul in the game to me is about, and as it relates to investing in business, is about taking pride in what you do and doing things the right way, even if it's at the expense of short-term reported earnings or short-term shareholder returns or any of these metrics. And often there's overlap, right? So if you look at a couple of power holdings, Alvian Age, you look at Donald Anon. I mean, he clearly has

enormous skin in the game, right, in terms of his equity in the business. But he also has soul in the game. And if I look at Markell and I look at Tom Gaynor, he's got very meaningful financial exposure to Markell. He's clearly got skin in the game. But just like in the case of Vuvium H, he's also got soul in the game, right? So he cares about doing things the right way, building for the long term, operating with great integrity. And the reason we find that it's so important is because it's the right kind of motivation, right? If you're a long term investor, you want to be invested with people who do care about building for the long term. One of our other holdings, Elmes, is another great example of soul in the game, the family, the sort of,

controlling shareholder or main shareholder in the form of the Dumas family, they really have sold in the game. So they will do things that in the short term may seem suboptimal, right? They will pull products off the shelves if they're, you know, they'd be known to do this in some cases. Products that are doing too well may come off the shelves or they will restrict supply of certain products. They may spend money in terms of product quality.

They may spend money on aspects of a product that may not even be visible to the end user or customer. but that's part of their DNA and it's doing things the right way. So I think it's hugely important. And I think we're lucky to have most of our portfolio companies. I think we see this, soul in the game. Now, in some, like at the Agio or Nestle, you're dealing with professional hired managers. So you could argue that's a different situation.

But I feel that we've found companies that are sort of professionally managed by people who really care about the business and who have a sense of purpose. So I think even in those types of companies, you can find people who have soul in the game. Yeah, that makes sense. You mentioned the family owners and having that soul in the game where it's much more than just showing up and getting a paycheck. What are some of the key signs that you look for to recognize that quality? Outside of something being family controlled, what are some of the key things you look for there? I think it's mainly looking at the way people behave. You know, it sounds obvious, but I think, of course, many companies will tell you about their culture and their way of doing things. And I think you need to spend a lot of time with or looking at a business to really get a sense of is this real? Is this the way people live, you know, live the sort of ethos of what they're telling us? So with a company like Markell, I think it's pretty clear to anyone that spends some time looking at the business and meeting with current and former members of the sort of management team

and that, you know, what you see is what you get. I mean, some of the things we look for might be the way they communicate, so or rather don't communicate with Mark. So in many cases, I think we tend to like businesses that aren't overly focused on communicating with markets on a regular basis. So because clearly that does suggest that these are people who are focused on the right things, which is running their business. And obviously you want them to be consistent about that. You know, you see the same type and frequency of communication when things are, when times

are good as good or bad. So that's one of the things we look for. But I think it's mainly just spending a lot of time, you know, speaking to people inside the business, people who have been inside the business at senior levels. I think it's clear to anyone that spends a bit of time around companies like LVMA or Markell or, you know, they have that sort of DNA. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually

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That's Shopify.com slash WSB. All right. Back to the show. You mentioned the family controlled aspect of the business. And this is quite an interesting concept. I was recently chatting with an entrepreneur on a trip. And he was telling me a story of building up this tech company, taking it public, taking on outside investors.

And, you know, essentially his company was hijacked from him. And, you know, these outside investors just have a huge influence on the company. And now he's essentially left there and he's not a part of it. And it's interesting to think about how there are these public companies that are family controlled, yet they're still able to operate as a family business and have that long-term approach and ignore the interests of Wall Street and such. So can you talk more about the importance of this and how it's something that's still able to play out in public markets? Yeah, I know it's a very interesting point. And actually, in some cases, if you look at a Markell, for instance,

Tom isn't even, he's not a member of the Markell family, right? But I think people, when, if you spend a bit of time listening to him and observing him, you feel like you almost come away thinking he is part of the family, right? Because of the way he behaves and communicates. And so you have, I think, in some cases with public companies, if you have the right people running it, they will operate like family businesses, even if there is no family controlling family shareholder. So you can have nominally they're not family businesses. But if in terms of the substance, they operate as a family business. You know, one of the things that I like about family businesses is that they take a very long-term view. So they are usually, not always, but usually looking at the next 50 or 100 years.

or beyond or probably more likely they have no time horizon, right? They just want to sort of preserve this for the next generation, who will then preserve this for the next generation? And I think they tend to be very good risk managers. So if like us, you are quite sort of focused on downside protection or capital preservation first, family control businesses tend to take, once again, there are exceptions, but I think generally they take a more prudent approach to investing upfront, the way they manage the balance sheets, all kinds of things, right? Reputational risk. So I think in those, they're two important aspects of why we like them. And then I think a third reason is that we are attracted to industries where there tend to be a lot of family-controlled

businesses. So if you take spirits, for instance, a large number, the majority of the listed company you see in that space will be family controlled. And I think it's usually a reflection of the fact that these are businesses that haven't required significant capital injections over time, right? So the families haven't been diluted. They've been able to maintain control of the business. So it's also a good sign or a good indication of a very attractive industry and business model where you see a company where the family's been able to maintain their control and influence over, in some cases, over hundreds of years, right? Because it suggests that the business is generating sufficient cash flow on an ongoing basis, not to require any

external capital. So yeah, we find there's a lot of, there's lots of reasons to like these family control businesses. Of course, there are risks inherent, you know, in the family business this sort of structure, I guess management governance or management would be the key one. So certainly it's not sufficient. It's perhaps not even necessary, but it's usually a good place to be looking, I find. And another thing that I've kind of gained more of an appreciation for is looking at the compensation structure. If you find a lot of people where they seem to be maybe not as compensated as well as they could be elsewhere, you know, they have the option to go make money somewhere else. So that's kind of a key sign where there's something there,

where they're in that position for much more than, you know, just to get the paycheck. Yeah, I think that goes back to the soul in the game discussion, doesn't it? You'd like to think that if there's more financial upside somewhere else and people choose not to, then presumably it's because they want to be doing this, right? They enjoy doing this. And I could imagine we were talking about Tom Gaynor. I would imagine he would do it for a lot less, right? I mean, he would do it, I think, regardless of almost what he's getting paid.

So you do want to find those types of people. Now, of course, if you're looking at a Nestle or a Diageo or a summer, of these large listed businesses with open shareholder structures, of course, you will be relying on a management team that has various types of financial incentive packages in place. And that's just the nature of it. But as a sort of as a basis for a portfolio or as a sort of foundation for a portfolio, I find that family control businesses can be a great sort of place to be looking. There's the saying in investing that if you've removed the downside, then all that's left is the upside. And you yourself, you put a big, big focus on removing the downside. And it's what you're

really looking to do before you start digging in and looking at the potential upside of a business. So can you talk more about how you came to appreciate this? Because it seems that if you put so much focus on removing the downside, then in some ways you might be limiting the potential upside. Yeah. And I think that's true, by the way. I think you probably are giving, not giving some of the upside away, but you probably are reducing your potential upside by doing that, right? Inevitably, if you are very focused on downside protection, you will probably end up in the types of businesses where the upside may be less than in some other case. Now, it suits us well because of the structure we operate, temperament, personality, the sort of the goals and ambitions

we have with. But of course, you know, if you want to be at the sort of top of the league tables on an annual basis, then that's a very different story. I think if you're as focused on downside protection as we are, then you are very unlikely to be anywhere near the top of those tables. And that's perfectly fine. In fact, if we ever were, I'd be slightly concerned because that would suggest we were invested in the types of businesses we don't want to be invested in. So I think you're right. You probably do give away some of the upside. I think once again, the reason we have that focus is partly the structure. It's partly a personality thing. And it's partly the idea of looking at what works and then doing it and looking at what doesn't work and trying to sort

of eliminate or reduce those activities. And I've just seen so many examples of people who seem to do well over long timeframes by reducing their downside and the idea of focusing on not doing anything obviously stupid as opposed to trying to be very smart about things. So we don't want to operate a strategy where we rely on being smart or having these incredible original insights. So for us, it's more consistently applying what we think is common sense in investing. I think That's probably the, I mean, there's obviously a more sort of philosophical foundation for this, which goes back, for downside protection, that is, which goes once again goes back to the kinds of ideas that, you know, Nasim Taleb discusses so well. So the idea via negativa and removing

sort of bad things and excess interventionism, et cetera, but I think in a practical sense, it just seems to work and it suits me and us. So that's sort of how we've ended up there. And actually, I should, sorry, I should add, you know, we look at that both at the company level and at the portfolio level. So downside protection, we're looking for layer after layer of it. So it's a good starting point if you can invest in good businesses with good balance sheets and robust or resilient business models. But it's nice if you can also diversify and you can avoid leverage and you make sure you have liquidity. So there's all these sort of layers to downside protection that I think really can add up to a pretty robust portfolio.

I was taking a look at your portfolio and you have 20 holdings shown on your site and you've stated that there's roughly 50 companies in your investable universe that you've narrowed it down to and that's something that's grown over time. What are some of the primary factors you see when you're comparing your current portfolio to what's in your investable universe? One of them would be typically be that some of these companies, we just haven't known for long enough. So we don't feel we understand them well enough.

So, you know, they may very well be great businesses trading at reasonable valuations, but we would like more time to understand them. So that would be one reason. Another reason would be if we already have high exposure to an industry. So Spirits is one example. We're in the past. There's a few companies that I'd quite happily own in the spirits sort of space, but we already have three holdings there and they represent maybe 20% of our portfolio.

So we feel I don't necessarily look at things from a top down point of view, generally speaking, but of course you have to sort of manage or call it factor exposures or your sort of concentration risk. So that would be another reason. I mean, they would probably be the two most common reasons. Then there's a valuation aspect. We may have a business on that investable universe that we know well enough and we think it's a great business and it works from a portfolio point of view, but the valuation is excessive and it needs to be obviously excessive. So usually if something, even if something's trading out a fair valuation, we would probably be buying into it. But if something is trading at very high multiples or a very sort of high valuation compared

to what we think it's worth, then obviously we'd wait and hope for a better opportunity. Now, sometimes that never materializes, which is perfectly fine. There's so many other companies to be looking at. And we feel we already have 20 great businesses in the portfolio. So they're probably the key reasons we wouldn't that something would be in the investable universe, but not in the portfolio. Your site also shows that you guys want to achieve sustainably high rates of return, the returns of the business, ideally are somewhat close or match the returns of the portfolio.

What do you define as sustainably high? And is that something that changes over time? So the reason we want businesses that generate sustainably high returns, that comes back to what we talked about initially, this idea that you want to be, or we want to be earning returns that reflect the performance of the underlying business. And that will only be the case over very long timeframes. So that's why we need that sustainability or durability when it comes to returns. Once again, we don't necessarily have a sort of hard number, but generally speaking, we're looking for something in excess of and hopefully well in excess of 10%. You know, it's not a

very original number, but it, I think it is a good hurdle, generally speaking, for the types of businesses we're looking at. And so we find there are a number of very good medium to large size listed distances that will, you know, meet that requirement, both in terms of the level of returns and the duration of returns. So that's sort of how we think about it. And I think the duration piece is very important because there is so much emphasis on the level of returns, especially over one and a three and a five year time frame. But I think the duration, you know, to come back to Markell, for instance, if you look at yes, 14 or 15 percent is a phenomenal rate of return, but I think the even more important aspect of that is the duration. You know, if you do it,

like in Tom's case for 30 or 35 years or whatever it is now, you get incredible outcomes, right? And you don't need to go as far out on the sort of risk curve either. So I think for us, the duration side of the equation is probably more important than for many. And we're able to capture that because of the permanence of capital and all kinds of other aspects of the setup. I love that you mentioned the duration piece. I was actually just listening to you chatting about Terry Smith's book, Investing for Growth. And he points out that, you know, people kind of get shocked by a valuation multiple and something might appear expensive. But when you are able to assess the duration of how much they're going to be able to grow and how longer they're going to be able to

do that, then people are essentially, they're just underestimating the power of compounding. When you'd look at over 10, 15 or more years, the compounding effect can easily be underestimated because we naturally think linearly and not in these, you know, exponential manners in which businesses operate. No, I agree. And that idea that these great businesses, the fade, you know, at some point, every bit, all businesses will die or decline, right? But what we're looking for are businesses where we think that decline or the fade will be much slower than most people think.

And I know, you know, I hear a lot of people saying this, but I do think generally speaking, it is a valid approach to investing, the idea that mean reversion doesn't happen after 10 years necessarily for these great businesses. Now, that's not to say that you can pay any multiple, and because after the facts, so, you know, for instance, there's this idea of justified P.E. ratios to sort of, you look at what P.E ratio could I have paid 20, 30, 40 years ago for a business and still having generated sort of returns in excess of the market. But of course, I think that's slightly deceptive because, you know, you cannot, before the fact, you cannot know with certainty that these are going to be incredible businesses. So I don't necessarily think you can, because if you do that

exercise for many companies, you end up with, you know, like a L'Oreal, you go back long enough. You know, you could have paid hundreds P multiples into the well into the hundreds or two hundreds. But of course, before the fact, you don't want to be doing that because things may not turn out so well, right? And I think generally speaking for these great businesses, because of institutional, the way institutional investors operate and their timeframes and their incentives, I think there are great opportunities to find companies where the rate of, of decline or the fade will be much slower than generally perceived. But of course, you still run the risk of mis-sort of understanding or misanalyzing the

business. I think that's the real risk more than in a sense that is a sort of other side of the coin, isn't it, in terms of paying up for a good business. I mean, the key thing to figure out is whether it's really as good a business as you think. I want to turn to discuss your experience working with institutional investors earlier on in your career because that seemed to have a big impact on you. How did that experience working as an equity analyst help shape who you are as an investor today?

Yeah, I spent the first 10 years of my career working for a few different funds covering European equities. And I think as a training, you know, it's a great place to train because you look at so many different companies, so many different industries, you get to run company meetings. You may even get some insight into the commercial side of it. So the fundraising and the marketing and the, so I think it's a great place to train, right? And you get this really useful sort of toolkit or analytical techniques in terms of analyzing a business and valuing a business. And once you've done that a few hundred times and probably thousands of times, right, looking at different businesses, you have this great database of, you know, what sort of, you know,

what are the hallmarks of a great business and what do I need to sort of look out for? And I think it has meant that in Europe, certainly I feel that I have a reasonably good idea of where the great businesses are, who they are, and not all of them. And of course, you have, you know, new listings and takeouts. So the environment changes a little bit, but I think it's been really helpful in that sense. Equally, there are some things you have to unlearn when you move on to invest in the way we do now. So, you know, you have to try and not be overly focused on news flow in the way that you are if you're an analyst for usually if you're an analyst for a sort of large institutional money manager. And actually, the other thing is I find you have to

get more comfortable with the idea of qualitative aspects of a business or an investment as opposed to the quantitative aspects because as an analyst for a large fund, much of your work is focused on numbers and KPIs and valuation models and that kind of thing. And of course, ultimately that's what matters, but the sort of process by which those numbers are generated, I think that's what you want to understand. And as you get more and more experienced, I think that's where you spend more of your time. So the culture, the business model. And usually it's not so easy to put your finger on these things, right?

It's usually a combination of factors. And sometimes you can't even explain why business is great. justice. And in some ways, that's even better because it makes it harder, I think, for others to replicate what they're doing. There are so many examples of businesses we've owned and other people have owned that are considered to be great businesses. And I think it's sometimes difficult to sort of summarize in a few words what makes them great. And in some ways, that's part of what makes them really attractive investments because they're difficult to sort of pitch if that makes sense. That's interesting. Charlie Munger has a quote of invert,

always invert. And when you get this sort of experience and I see how much different your fund operates versus a lot of other funds, you know, having this very long term approach and having very little turnover. And I think that's one thing that you've sort of picked up is how short term so many institutions can be. Yeah, I think there's a few issues that I think the time horizon is one of them. I think that's partly because of, you know, incentive structures. Clearly, I've been in that environment myself, the annual bonuses or even the equity or whatever financial rewards there are, but clearly that creates a short-term sort of mindset. I think it also, an industry, especially the institutional world, it attracts, I think, is often a certain type of person that, you know,

is looking for activity and turnover in the portfolio and, you know, there are certainly dangerous there. I think team structure is another challenge. So especially if you have teams of analysts, You know, I've seen this myself where, of course, the analysts, you know, your idea generation is one of the important aspects of your job and your pitching idea after idea. And then at some point, you know, the PM inevitably will feel that they should probably be buying some of the things you argue for. I know most experienced portfolio managers are very good at saying no, and that's their job.

But I think there is always that pressure, I think. And so I think that's certainly one issue. There are probably two of the, and then of course, it's the fact that I think the commercial side of it, that most institutional money managers are much more in the business of racing assets or gathering assets and earning fees on other people's money than focusing on returns. And fine, it's a fabulous business model, but I don't necessarily think it's the right investment model, if that makes sense. I think it's, you know, it's very unfashionable to be running a sort of, call it internally managed vehicle in the way that we do or a lot of, you know, you get some

private and listed investment companies. Certainly in Europe, you have quite a few of these and in Scandinavian, Sweden, where I spend some of my time you find them. And that's a very unfashionable model, but I think it's very effective. You have the permanent capital. You have very low sort of operating costs. You have, I think, generally good incentives. So there's a lot to be said for that. I think the fund model, I think, has a number of flaws. Having said that, of course, there are people who operate it successfully, right? Whether it's, you know, we've talked about some of the UK examples like Linzel Train and Fund Smith or a TCI or an AKO capital. And then And in the US, there's, you know, endless numbers of wonderful, long-term-minded, quality-focused funds.

But I think it's harder unless you have a name and a track record and the right investor base. Yeah, it's a really great point of, you know, many funds are essentially marketing firms just trying to bring in clients. And then you think about what the implications of that are. And they don't want their returns to deviate too much from other funds or deviate too much from the market. because if they underperform by a certain margin, which any approach is going to eventually, then if they underperform, then they're going to see their investors bailing. So essentially, if they're operating like a marketing firm, I would think that their incentive is to be as close to the market as possible.

Yeah, and ideally, of course, a little better. But yeah, someone I worked for, he described this as it becomes a case of product management as opposed to asset management or money management, right? You're managing a product as opposed to other people's money. And I think that's a real issue. I mean, I have no solution to that, well, other than setting up a different type of structure. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund fund fund's prospectus at fundrise.com slash income. This is a paid advertisement. back to the show. One exceptional business I wanted to talk about more today was Markell. And you talked a bit about the qualitative aspects of a business. In the short term, oftentimes what drives a stock price is just the change in the multiple

or the change in the sentiment. But over the long run, oftentimes what determines the returns is things like the culture and the people that work there. So that's one thing you've talked about that stands out with Markell. and Tom Gaynor being the CEO there. I'd love for you to expand on some other things that stand out to you about Markell. I think it is such a good case study because it is a unique culture and most people I speak to who have had sort of senior experience at senior levels of the company, they all tell me what you see is what you get, right? It's the real deal. And that's my impression

from having spent a little bit of time around some of the people who sort of operate some of these businesses within Markell. Yeah, I think it is the culture. So, you know, know, there's a number of aspects to that. One of the things that I love about the culture there, and by the way, I think people talk a lot about Tom and I think he's clearly super important, but I think it goes beyond him. I think they have been very good at. It's my real sense that they have been very good at institutionalizing this. As with any business, as you grow, that becomes more and more challenging. But I think so far, generally speaking, there seems to be a real sense of purpose there. Yeah, one of the, if we talk about

Markell and Tom, I guess, you know, one of the things that I love is how they combine this, discipline and the principles. So, for instance, the four pillars they use for four filters, they use for analyzing business in terms of return on capital, reinvestment, management, and the price you know, the price you pay, the entry price. So they're very disciplined about that and it's a very simple, replicable kind of model or filter. But equally, I think they're very pragmatic in terms of how they implement that. So you look at the fact, for instance, that they have all these monitoring. Obviously, it's a relatively concentrated portfolio. If you look at the top five or 10 holdings. I'm talking about the financial investment side now. But then,

of course, they have a very large number of very small holdings, these so-called monitoring positions. And it's just a very pragmatic way of addressing an issue, which is, am I more likely to keep on top of these businesses and sort of care about the financials they print? And if we have a tiny exposure, and if the answer is yes. So it effectively comes back to the idea of doing what works. So I think That's one example. I think in terms of their conservatism or prudence, I think is something I really like, right? So they're really, I think Thomas said, you know, he wants the business to be immortal. He's looking at the next 50 or 100 years and beyond. And one of the aspects of that is, of course, running a very prudent balance sheet. And that's partly avoiding leverage or excessive

leverage or, but it's also things like the way they, you know, the accounting treatments, they apply in terms of, you know, insurance provisions. So I think there's all these layers of trying to make sure that they're around for another 50 and 100 years and beyond. And I'd like the fact that Tom strikes me as a gradualist. So I think he uses the expression of crawl, walk, run. So, you know, he will try something in small measures. And if it works, they'll do a bit more of it. And if it still works, they'll do a bit more.

And so if you take a holding like, so Diageo is a good example because it's, that's something we've held for a long time as well. I think they've been invested for 25 years or more, 30 years. perhaps. But I know that's one of these holdings where gradually over time, they've just been adding a bit here and there. And so you know, there's nothing dramatic going on in terms of portfolio weights, et cetera. But over time, they do more of what works and less of what doesn't work. I think if you look at the way they think about buybacks, so I think certainly in the last few years, given the share price sort of relative performance of Markell shares, I think Tom acknowledges

that buybacks make sense in principle. I think he also feels that many investors would like them to be buying back shares at a faster pace, but he feels that directionally it's right, and we want to be prudent about the balance sheet and all these aspects. So I think he's really about doing what is, as he says, directionally right for a long period of time and you'll get good outcomes. So it's just a very pragmatic approach to the world and to investing. And what I really like about it is that it's replicable. So there's all these wonderful investors out there, whom I can never. And in some cases, I wouldn't want to try and do what they're doing. I think with Markell or certainly the way Tom sort of runs the investment portfolio. I think many of us,

you know, we may not get the same outcomes, but I think we can try and sort of operate in a similar way. So I think it's such a good role model to be looking at. To your question, Clay, I think what's unique about Markell, I think it is, you know, in a way as simple and as hard as it's the culture, ultimately. Yes, I like the structure. I like the, you know, I think the insurance business is probably a good insurance business. I like the three legs in terms of investments, insurance, ventures, but I think it goes beyond that. Because if that was all there was to it, then I think it would be not easy to replicate, but there would be a blueprint. But clearly, clearly there's more to it than that. Yeah. And you do mention the, you know, you can kind of

model Tom as an investor in the way he operates. And I think I do see a lot of similarities in the way you and Tom invest, where you'd rather compound at a moderate rate over a long period. Well, I'd love to compound at a high rate, but if I can't, the second best option is a Yeah, putting for a long period of time. Yeah, I just think putting a big emphasis on that durability and trusting the power of compounding, I think. Exactly. And I think it's partly also, you know, once again, being very pragmatic about it. I think that means investing in a way that you can probably sustain also from a lifestyle point of view, right? You know, you avoid the sort of risks of burnout that some people who post incredible returns for a shorter time frame might sort of suffer

risks sort of running into. Of course, I admire you look at people like Lynch and Drac and Miller and I think for most of us there, and I would argue in some cases, even if they tried to replicate what they did, in many cases, they would struggle to sort of replicate those numbers. So, you know, it's inspiring and it's interesting to read it and think about, but is it a good sort of model for most of us? I suspect not. So you own Berkshire Hathaway and Markell. Are there any major differences between the two, or do you sort of see a sense? similar outlook between both of them, given that they have very similar business models? Yeah, I think there are similar in many ways. Obviously, the cultural aspects, you know,

the structure with privately held businesses or fully owned businesses and investments and insurance. I think, yeah, the differences that I see are on the one hand, scale or size or complexity. Clearly, Markell is one would hope at a much sort of earlier stage of its journey, especially when it comes to fully own businesses. So Ventures is a relatively sort of recent, certainly if you compare to Berkshire, a much more recent sort of focus area for them. And I think all of us expect that to become a much more important part of their business going forward. Yeah, I think clearly the scale means that I would assume, I would expect that Markell, there is more uncertainty, if you will, for good and bad, so both on the upside and downside.

So I would like to think that if things turn out well, the upside is perhaps greater for a Markell because they're smaller. They can look at types of businesses that Berkshire can't. But of course, on the downside, they're not as diversified, right? They don't have the same positions. If you look at the insurance business, of course, they're not as sort of they don't have as broad portfolio. So I think the uncertainty there is perhaps a bit greater. I think they're both fabulous businesses in slightly different ways. The other difference, and you know, we could argue about this, but I would think that in the case of

of sort of key person risk. I would assume, you know, hopefully Tom will be running Marquale for a long time, but you know, when we get to the point where he hands over to the sort of next generation, my feeling is that Markell will look less different after Tom hands over the reins than Berkshire will after warrant us, right? I would, for a few different reasons, I would assume that things might change a little bit more at Berkshire than they would at Markell. But of course, I, you know, that's me speculating there. also wanted to tap in to the spirits industry a bit. You mentioned that 20% of your fund is invested in that industry, I assume across a wide variety of different countries there. So some of these

stocks are Diageo and Remy Contro. And they've actually had a pretty rough 2023. So I'm curious what your thoughts are on that industry and specifically your thoughts on how these stocks have performed this year. We love the industry. We've been invested. Currently, we have Diageo, Remy, And then we have David Campari and also we, it's not a distiller, but we're invested in Heineken Holding. And we've owned some of the other distillers in the past like Brown Foreman. Yeah, there's a lot of aspects. There's many aspects of those businesses that I think really suit the way we think and what we're looking for. So in terms of clearly the, they're very durable portfolios of brands, right? So they have that sort of durability to them. They're time tested.

They're great collections of brands. I think for consumer goods, it's an unusually dynamic category. And it's one of few, I think, major sort of consumer goods categories where you see growth in developed markets. So in emerging markets, clearly it's more about volume growth and to some extent, premiumization. And in developed markets, it's more about the premiumization aspects of it. But overall, these businesses are showing growth across the board, normally, not in the case of the Agile, but in the other two, you know, in the case of Remi and Campari, there's the family control that we talked about earlier. So we think that provides this long-term mindset. There's a number of aspects of these businesses that we really like.

You're right. So this year, now normally, you know, I find nine months or 12 months, you know, it's a relatively short timeframe, but of course, you need to sort of be aware of what is the market trying to tell us? I think it's clear that the issue this year has mainly been that the US market, which is super important if you're a spirits company. So in the Agile's case, I think close to half of their eBits from that part of the world. So it's a very important market.

And of course, having had an incredibly strong run during the pandemic, and coming out of the pandemic, there's been this very significant slowdown in the US market this year. And in some categories, especially cognac, growth has gone into reverse, right? So they just saw this tremendous growth, Cognac, especially during the pandemic. And then there were perhaps going into this year, inventory levels were a bit higher than normal. And then we've seen both underlying growth in terms of depletions, but also de-stocking this year. So there's been a very dramatic shift. And of course, you also have difficult sort of comparatives from last year. So that especially impacted a company like Remy because they have a Likerson Spirits division,

but Cognac is sort of, you know, that's where they make their money. So that's been very, I think, painful for them. It's also worth keeping in mind that Remy was trading at pretty high levels going into all of this when they were, I think they were trading just north of 200 euros. And so I think, you know, Remy's down 40% or something from the all-time highs. So the issue has really been the U.S. market and especially in Conyk, And of course, that's impacted the Agile to some extent as well, but much less so because they're much more diversified across categories and brands and geographies.

So normally, you know, those types of, call it resets, might create opportunities for something like ourselves because we're not overly concerned about what a certain category does in six or 12 months and even less what de-stocking, the inventory situation. I think for us the more important question is a structural long-term question, which is in Cognac especially could we see a shift towards other categories and especially tequila, which is doing, has done. And obviously, growth has come down there pretty meaningfully, but it's still doing very well in the US. The US, I think, is like three quarters of the global total for that category. So it's really a US market or a US business at this point. But we see some of the same

occasions and some of the same customer demographics, et cetera, as for Cognac. So I think for us, that's the more important question. Now, I still have faith in Cognac being a sort of a good place to be invested for the long term, but that's the kind of thing that we would try and understand better. Could there be a structural shift to some extent? I think the US market sort of slow down and the de-stocking were less concerned about, but it's very important to be aware of it, because it's those kinds of things that may create an opportunity, right? If you figure out that there's been a sort of real reset in the share price for short-term reasons, that would usually be a good place to be looking if you're a long-term investor. So I think there are the issues. Slightly

less important is probably the sort of the fact that the Chinese recovery has been for these companies been, I think, slightly disappointing. It's not been as sort of dynamic as we were hoping, but overall, we remain very happy holders of these, of all these companies. Towards the beginning of our chat, we chatted about reinvestment opportunities. And one company that stuck out to me that seemed to be more on the mature side was Diageo. I noticed that over half of their cash flows are going towards dividends and share repurchases. And I'm curious about the runway for a company like this and how that plays into when you would ever sell maybe a mature business because we talked about at the beginning, you

know, a quality investing approach. Part of that framework is the runway for growth within a business. No, it's clearly super important. I think organic growth, if I had to look at one metric operating performance metric over time, And clearly that's got to be it because that sort of that informs everything. Hopefully if you have good organic growth, you have operating leverage and you have sort of leverage on your underlying EPS. So that is, that's key.

You know, on the one hand, you could argue these are relatively mature businesses. Having said that, so Diageo is the largest international premium spirits player out there. Their share of total alcoholic beverages, global alcoholic beverages, I think is less than 5%. So clearly, even for a company, the, size and sort of complexity of a Diageo is a highly fragmented market if you look at it on a global basis. So I think that's a good sort of starting point to be aware of. If I look at historical growth rates, you know, this is an industry that if I look at the last 10 years might have been growing at 5 or 6%, which I think is a healthy growth rate. So for this type of business,

if we can get 5 or 6% organic growth over time and say close to or around or slightly in excess of 10% underlying earnings growth or EPS growth, I should say. That can create tremendous value over long periods of time. And then there's the fact that, you know, there are pockets within spirits where you see tremendous growths. So we touched on tequila. I think tequila, that market has doubled over the last five years. And within that, if I look at the last 10 years, Diageo has gone from something like 2% market share to almost 20%. I think they ended last year at maybe 18% or something. And that's mainly because they own two of the best performing or probably the two best performing brands in the category, Casamigos and Don Julio. So that's been an incredible success for them.

So I think if you're, you know, it speaks to dynamic portfolio management. So if you, you know, you need to sort of pay attention to where the growth is or rather will be and you need to invest behind that. And they've done that very well in some cases and especially in the case of tequila. And I see this in some of the other portfolio companies. So like a Nestle for instance, they've been very good at shifting resources to faster growing categories like coffee or pet food or health and nutrition. So I think it's possible for these large, diverse or diversified organizations to get exposure to these pockets of growth if they're sort of dynamic about how they shape their portfolio. So I think there's plenty of runway for growth here for the overall market in terms of potential

market share gains. There's volume growth, there's premiumization. I think there's a, there are a lot healthy drivers here. And I know there's concerns about, from a business point of view, about young people sort of consuming less. And I think that's only partly true. I think if you look at the developing world, it's not true at all. I think what you usually hear is that in more mature markets, consumers, especially young consumers, tend to drink less but better. I mean, in many categories, they're not even drinking less. So I think sometimes that's where opportunities arise where there's a narrative out there that some of these categories are dying, And some of them look less dynamic.

You know, vodka in the US is not terribly attractive. But overall, I think there is a slight disconnect between if you look at the hard data on market size and all these things, it tells a slightly different story, I think often in certainly in alcoholic beverages. Similarly for beer, I think if you manage these things well, I don't think the outlook is nearly as bleak as I often hear. But of course, there are challenges. And that's the reason why alcoholic beverages represent 20% of the portfolio, right?

I think they're great businesses, but I don't want to have, that seems like a sensible exposure. And, you know, within that, we own companies with different exposure to different types of categories and geographies. And so there's all these layers of we will be wrong about a number of things. So we just need to make sure that we can manage and mitigate the impact of that. Just speaking from personal experience, it seems like SELSERS is an area that just seems to grow more and more with you see a new brand popping up on the shelves each year. Absolutely.

I think clearly, just like for tequila, I think growth has come down quite dramatically, and that's the demand side of things. And of course, in terms of the supply side of things, everyone wanted to get into that game. I think most of the companies, you know, we're invested in. One of the things we'd like about them is they're in categories like cognac where the barrier century are so much higher. So you're not going to have the same sort of huge influx of new capacity in those categories. So the demand side is important, but so is the supply side. So that's sort of how we think about spirits broadly. Well, Christian, this is a fun discussion.

I'm really happy. We had the chance to connect and bring you on the show. Likewise. Before we close out the episode here, how about we give you a chance just to, you know, let the audience know how they can get connected with you and learn more about your fund if they'd like. Yeah, we have a website. We outlined the philosophy, our holdings. There's a bit of material on there.

You know, a few interviews, articles that may give you a sort of feel for how we invest and how we think. yeah, there's contact details on there and the address is Billinger for vaultening.se. And I'd be delighted if anyone wants to sort of discuss any of the names we've covered today or anything else. And thank you for having me on. I really enjoyed the conversation, Clay. Wonderful. Thanks so much, Christian. Thank you. Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only,

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