What did Rob Vinall learn from his closest friend Andreas Lechner?

Andreas Lechner is a close friend of Rob Vinall. In this conversation he outlines his investing style in an exchange with Rob during the RV Capital meeting in Engelberg.

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Introduction

[00:02:37] Rob Vinall Vinall: It’s a real pleasure to introduce to you Andreas for the fireside chat coming up now. Andreas gets to live the dream of many of us. He manages just his own money. Actually, when I met him, he told me he’d never actually worked for anybody else. We’re going to get to how that can be possible without coming from a very wealthy background at any rate. Andreas is German. He’s born in a small town in Bavaria, but moved to Switzerland about five or six years ago, not far away from where I live with his wife and the son, Robbie.

I think I met Andreas for the first time probably about 15 years ago. We hit it off really almost instantly. Over the last 15 years, Andreas by a long way has been the person I’ve spoken to about investments the most, I would say, at least weekly and in many cases, daily. It’s great that you guys get to see probably my single-most important sounding board. [chuckles]

[00:03:45] Andreas Lechner: Thank you, Rob, for this introduction. I enjoyed our friendship a lot and our discussions. It helped a lot to shape the investor that I am.

[00:03:55] Rob Vinall: Yes, I think we’ve shaped each other on the journey. It’s been very much a mutual-

[00:03:57] Andreas: Yes, indeed.

Andreas’ education

[00:04:00] Rob Vinall: -thing. I’m pretty sure apart from your friends here, that nobody knows you. Why don’t we start by talking about Andreas before investing, what you did at school, some of your hobbies, some of your activities from way back when?

[00:04:15] Andreas Lechner: I was born in 1977 in a small town in Bavaria, in Southern Bavaria. In high school, I was mostly interested in hard sciences, in computer science, in mathematics. I took some additional courses in there to learn how to prove a theorem and to learn how to program, and also in physics, in theory of relativity and things like that. My interests were not in any way related to economics or the stock market.

Even though the first time I touched with the stock market was in 1985 when one day I came home from school and my mom told me she had purchased one share of BASF for my account. [chuckles] I was not sure what that meant. She explained to me, it’s part ownership of a chemical company. From that day on, we would every day, I come home from school, listen on the radio to what the stock did on that particular day.

Andreas’ first stocks

[00:05:22] Rob Vinall: It makes it sound very old when we have to get stock prices from the radio.

[laughter]

[00:05:27] Andreas Lechner: Exactly. In 1985, that was, I was eight years old. I think we held the stock a couple of years. I think she purchased another couple of shares, Volkswagen and Siemens. After the 1987 crash, I think we sold.

[laughter]

[00:05:47] Rob Vinall: Not very promising beginnings.

[00:05:49] Andreas Lechner: That was the first time I touched the stock market. At high school, I was, as I said, mostly interested in sciences, in computer science. I spent my free time computer programming, participating in some competitions in computer science and mathematics on a national level and succeeded in a way. I wrote a book on game programming together with a friend in school. That was approximately in 1994 or something.

[00:06:25] Rob Vinall: How old would you have been then roughly?

[00:06:27] Andreas Lechner: 1994, I was 17.

[00:06:29] Rob Vinall: 17. You were a published author at the age of 17?

[00:06:33] Andreas Lechner: Right.

[laughter]

The book was not a commercial success though.

[laughter]

It was not appealing to a large audience. I think we have not even sold 2,000 books that were initially printed, and the

[00:06:54] Rob Vinall: There’s still hope to get a copy then?

[00:06:56] Andreas Lechner: Yes, there’s still a copy around for you. How did I re-engage with the stock market?

[00:07:07] Rob Vinall: I’m supposed to be one asking you the questions here.

[00:07:09] Andreas Lechner: Okay.

[00:07:10] Rob Vinall: How did you re-engage with the stock market?

[laughter]

[00:07:16] Andreas Lechner: That was in 1995 when another friend from school asked me to join his team in a stock-picking contest organized by the local savings bank. The contest was structured in a way that it started in September and lasted till the end of the year. They gave you a list of a hundred companies, and you had to pick a portfolio. You could trade in between. I went through this list of 100 companies, and one company that stuck out to me was SAP, because, I was interested in everything related to software, computer science and so on.

This was a large company apparently already in the midcap index with a market cap of several billions, I think at the time, one or two billions, and I’ve never really heard of that. I’ve heard of Microsoft. I’ve heard of Borland and Adobe, but I’ve never heard of something like SAP. It was a completely different world. In October of every year, there was a computer trade fair in Munich called The Systems. I went there and went to the exhibition of SAP and asked the consultants there about the company.

I learned that they have approximately 40% recurring revenues, and that it was very difficult for a customer to switch away from them once they have signed up. They had a lot of room to grow. They had hardly even penetrated Europe, let alone America or Asia. They had many more ideas of where to expand beyond ERP software. I felt like they were growing at the time at 40%, 50% on the top line. I felt like this can go on for a long time. I discussed it with my friend whose team I joined. He reminded me, well, it’s 25X earnings, looks very expensive.

He had better be sure that it grows for a long time. He told me a non-growing stock would trade at around 10X earnings. It was obvious that they had to grow at least two years at 50%. What this consultant told me made me feel very comfortable that it would go on for much more than two years. I’m not sure if we purchased it for our team, but I felt compelled to– I had savings of 15,000 at the time. I put all of my 15,000 of savings into SAP at the time. It doubled within six months, and that double was tax-free. It was quite an experience for a 17-year-old, you could earn 15,000 without much work-

[laughter]

-whereas the first 15,000, I had spent all of my school holidays working in some publishing company, taking on some job in the vacations, writing this book which contributed a few thousand and was probably an hourly salary well below maybe below a euro or two.

Why Andreas invested directly in quality businesses

[00:10:42] Rob Vinall: I think it’s fascinating as you tell your story that– Because a lot of younger guys or girls come to investing very much through the quantitative angle. They discover Ben Graham and start comparing price to book values and looking for low PEs, but you came right from the beginning very much from the perspective, is this a business which has a long runway ahead of it?

[00:11:00] Andreas Lechner: Exactly, yes. This was something that intuitively appealed to me when I heard it from those guys at SAP. I sold it half a year later. Then I did nothing for another half year. SAP continued growing. It became cheap again, price earnings ratio again 25 or so. What did I do with my €30,000? I purchased again all of SAP.

[laughter]

This time, it didn’t go quite so well. It initially started rising, but then they had a bad quarter and the stock crashed 30% in one day. That taught me a lesson.

[00:11:46] Rob Vinall: That taught you about Mr. Market then.

[00:11:48] Andreas Lechner: Yes, it taught me a lesson that maybe a little bit of diversification is a good thing.

[00:11:54] Rob Vinall: I want to take a quick step back. You said you started with DM 15,000, which is a decent amount of money back then.

[00:12:02] Andreas Lechner: In euros is DM 30,000.

[00:12:05] Rob Vinall: 30,000. Where did that money come from? How did you get that started?

[00:12:08] Andreas Lechner: Holiday jobs, writing this book, some prize money I got from these computer science and math competitions, just saving a lot. I was never spending on the things that teenagers usually spend their money on. I was always a pretty frugal person.

[00:12:31] Rob Vinall: I can confirm you’re still a very frugal person. [chuckles]

[00:12:36] Andreas Lechner: Yes. That is the initial source of that. There was no inheritance of any meaningful amount at that time. During my investing years, there was some small inheritance, but that was very, very tiny.

Andreas early and aggressive investing strategy

[00:12:52] Rob Vinall: Okay, you had a great experience with SMP, sorry, SAP, excuse me. What happened after that?

[00:13:01] Andreas Lechner: When it crashed 30%, I sold half of it, and the other half I kept and I was looking for what to do now, and there were some magazines published in Germany which had in the back part, much like in Barron’s, a list of all public securities, almost all with some core numbers, and this was my first initial screening tool, and I found a class of securities which were kind of options that were stripped off convertible bonds.

They had a long runway, more like five to 10 years issued by rather solid companies, usually somewhat capital-intensive companies because, otherwise, they wouldn’t even issue a convertible bond, and these options were trading at ridiculously low valuations relative to their fundamental value. You could find the underlying stock trading at maybe €100, the exercise price being 80, and the option trading at maybe 18 or 17. So, below its intrinsic value even though they had still seven years of remaining lifetime.

You could not just pick one of them, you could build a portfolio of them. These were solid companies or fairly solid companies. I remember I had a couple of cement producers, I had some banks. These were the 1990s, so everything was rising at a very high clip, and I figured even if the stocks go up at the long-term average of 7%, I should do really well with that, and I was really–

[00:14:47] Rob Vinall: Effectively, you’re leveraged five times.

[00:14:49] Andreas Lechner: Yes, maybe five times leverage, and I didn’t pay any time value of the auction, and so, you can imagine when you do well with– you would do well with 7% return of the underlying in the 1990s, the German stock market index return 25%, something like that per year. You do really well when you have a leverage position in that, and I didn’t at the time consider the risk as badly because my plan was to work as a mathematician later on. The savings I put into these securities was tiny in relation to what I would potentially later earn. This changed at some point, at which point I switched to a less risky strategy, and there were also a lot of growth companies at the time in the German stock market.

[00:15:49] Rob Vinall: Give us a sense of the returns from these options that you got then.

[00:15:52] Andreas Lechner: Okay, basically from 1994 to the year 2000, I compounded at annual rates well above 100%.

[00:16:01] Rob Vinall: Per annum?

[00:16:02] Andreas Lechner: Yes, per annum.

[00:16:06] Rob Vinall: So, by the end of the ’90s, you were quite a wealthy guy, is it fair to say or?

[00:16:10] Andreas Lechner: Yes, that’s fair to say. When the Dot-com crash happened, I felt like, “Okay, maybe I have to readjust a little bit my strategy because I don’t want to lose all that again.”

Andreas strategy after 2000

[00:16:23] Rob Vinall: Obviously, you probably felt like king of the universe in the ’90s. Went from being a school kid to probably a very wealthy individual probably with a degree– well, complete financial independence by this point, but then of course, the world came crashing down with the Dot-com crisis, 9/11, what happened then?

[00:16:43] Andreas Lechner: I read about Warren Buffet in 1996 or so, Rob Vinall Hagstrom’s, The Warren Buffet Way, and it occurred to me, the whole concept makes sense, but I don’t think I have to restrict myself to non-tech companies, I can just apply those frameworks that were explained in the book on tech companies. I didn’t fully understand why Buffet didn’t invest in tech companies, maybe it’s just true that he doesn’t understand them well.

During the 1990s, I invested in several software companies, not just SAP, and they were plentiful at the time and did rather well. In the year 2000, I started doubting that maybe the technology industries as a sustainable and as viable as I thought it would be, and so I started reading in more detail about Warren Buffet. I started reading all the Buffet letters at the beginning of 2001 and thought, “Well, maybe there is a good reason he doesn’t invest in technology,” and the reason probably is that corporate lifetime is not as long as I thought they could be. My experience was with Microsoft, SAP, maybe they have a long lifetime but not everyone has. A lot changes in these industries, and I readjusted a little bit having a more balanced portfolio.

Bijou Brigitte

[00:18:20] Rob Vinall: But not enough if I recall the story correctly.

[00:18:22] Andreas Lechner: Yes, I still did rather well. In 2001, I found Bijou Brigitte, which was a chain of costume jewelry stores. They had about 300–

[00:18:38] Rob Vinall: This was now a switch away from technology more to kind of traditional types of businesses.

[00:18:41] Andreas Lechner: More traditional types of business, though I still held a portion of my portfolio in technology, but I was aiming for a better balance, and Bijou Brigitte seemed like a good idea.

[00:18:59] Rob Vinall: Maybe quick words on Bijou Brigitte as I’m sure a lot of people here won’t be familiar with what the company does.

[00:19:03] Andreas Lechner: Yes. They’re a custom jewelry store chain. They had 300 stores in Germany, and at the time, they were starting to expand in Europe. Some of their markets outside Germany did rather well. In the Netherlands, they had a few stores which were running well. They were opening a few stores in Spain, and I ordered all of their annual reports, they wouldn’t talk to me in the year 2001. I called them and then they said, “Okay, don’t tell us your questions, please fax them to us.” I faxed them the questions, and four weeks later, I got a response, “Well, they are all insider related and we don’t answer any of them.”

I think it was just a lazy response because, none of them was insider related, so I just ordered all of the annual reports that they ever published, they went public in 1990, and their annual reports reached back to 1989. In 1996, they said– well, they had really good numbers at the beginning of the 1990s, earning 30% EBIT margins. Really, really great business, and they deteriorated and the bottom was in 1996 when margins reached 10% or so. In their annual report they said that they acquired a competitor called Rubin in that year from Woolworth, and several other competitors went bankrupt in that year, and that now no competition is left.

[laughter]

Imagine reading this in the annual report of 1996 and it was 2001 when I invested in that, and the numbers were pointing up since then. Their stores outside of Germany were doing really well, and it was a company led by an entrepreneur. It was founded in the early ’70s, I think 1972 or something. Oh, it has to be a little bit earlier, late 1960s. A lot to like from that perspective, and the valuation was really cheap, more like, it was seven times earnings, they had no debt. They were growing revenues at 10% a year, paying a 7% dividend yield. They didn’t even pay out all of it.

Just from the dividend yield and the growth rate of 10%, if this continues and it seems like they had all of Europe ahead of them, they could deliver 17% return, and on top, the price earnings ratio was around 7, so if you get a modest expansion of that, you should do really well. I put 30% of my money into that.

[00:21:55] Rob Vinall: That was the third defining investment obviously.

[00:21:58] Andreas Lechner: I would say so, yes.

[00:21:59] Rob Vinall: You had SAP, then you had the Options, and then Bijou Brigitte. What were the ballpark returns you got from? How long did you hold it?

[00:22:06] Andreas Lechner: I held until 2005, approximately four years, even though I sold on the way up, it went up 20-fold from the place I bought, and the company did really well soon after I bought, the expansion rate increased. Normal 10% growth but a 30% growth coming from 20% store expansion and 15% or even 35% growth. 15% expansion in same-store sales. So, yes, I was a bit lucky in that. The stock went up 20-fold, it became a much larger part of my portfolio. I stabilized it at 50% thinking, “Well, I don’t want to take too much risk.” It was also clear to me that 15% same-store sales cannot be sustained for very long as a retailer. Some years are up, some years are down. Looking at the history of Bijou Brigitte and seeing it decline from the early ’90s to the mid-’90s made it clear that 30% operating margins which they had in 2005 would be unsustainable. In 2005 I sold the last shares.

[00:23:23] Rob Vinall: Another wonderful run from the bottom of the Dot-com crash up until the financial crisis. how did you fare in the financial crisis, and were there any important lessons you learned from that period?

[00:23:34] Andreas Lechner: Absolutely. After I sold Bijou Brigitte, I was searching for some software companies. I started to unlearn one of the lessons I learned from the Dot-com Crash, which was not to invest in technology. I thought, “Well, maybe you have to distinguish.” I read a lot of books at the time about strategy, about competitive advantage, about valuation of securities, and it felt to me there was nothing really wrong with software.

Nemetschek

[00:24:11] Rob Vinall: This is now prior to the Financial Crisis or?

[00:24:13] Andreas Lechner: Prior to the Financial Crisis, yes, in 1990. In 2005, I purchased first stake in a payroll software company, and also in an architectural CAD company, both of which were left over from the Dot-com Crash in Germany, but they did rather well. Expanded steadily at 10%, maybe at 8X operating earnings.

[00:24:40] Rob Vinall: Those were the days. [chuckles]

[00:24:41] Andreas Lechner: I built a really large position in this payroll software processing company, which at one point in time was 2/3 of my portfolio. With that portfolio, I went into the Financial Crisis, so I had 2/3 in this payroll software processing company, then some in this architectural CAD company, and I had a position in a MedTech company that was owned by a person I knew very well, an investor from Munich, and who I thought was a good owner. He really was, I think. It was all small caps. When the Financial Crisis hit, the bottom fell out for many of these small cap stocks.

[00:25:26] Rob Vinall: The share prices, not the businesses.

[00:25:28] Andreas Lechner: Yes, the share prices. The business did rather well. They had no debt and were doing really well. For instance, this architectural CAD company, Nemetschek, it went at the bottom in 2009 to approximately a little bit of debt because they were acquiring a competitor just before the Financial Crisis, but let’s say 2x EBIT. I would have liked to purchase a lot more of that. The problem is just, I was locked into the other securities I had, which were also very cheap. It was a bit of a problem. I would have liked to readjust. Maybe sell some of this payroll processing company, which I could have done if I had accepted a 20% lower price, and only then would I have sold maybe 5% of my position.

It was not clear I can sell a meaningful amount and put in Nemetschek. The lesson learned probably was, you should put some value on opportunity cost. You should think a bit harder about opportunity cost. Being in all these illiquid small caps causes an opportunity cost because you cannot readjust if an opportunity comes up. This shaped some of my investing in the later years.

[00:26:54] Rob Vinall: Maybe describe some of the decisions you made as a result of that.

Microsoft

[00:26:58] Andreas Lechner: Yes. The payroll software processing company was ultimately acquired by Carlyle in 2010, which left me with a big cash position, and in 2010, I put that into Microsoft in late 2010.

[00:27:17] Rob Vinall: Partly out of the conviction that Microsoft was a great business but partly also thinking, “I want to be liquid if I can buy a company at 2x EBIT again.”

[00:27:24] Andreas Lechner: Exactly. Microsoft was really a good company and cheap at the time. Maybe 10x earnings, growing at 10% a year. Their Windows franchise was a bit in doubt, but my way of viewing that was they had a lot of pricing power. For instance, Windows revenues were around $15 billion. They are not much higher than that right now. They had 1.5 billion Windows users, so they were generating just $10 in revenues per Windows user in the year. So what would happen if they increased that to $20 or to $30? I think not much would happen.

The same could be said I think for Office and some of the server products where they had really great success in the 1990s and 2000s. SQL Server became the number two database and Sharepoint server, an Exchange server, they were taking a lot of market share from Lotus notes. The products were very competitive, and in the annual report of the year 2010, which was published in October 2010, I read that 70% of their developers were working on cloud products in the past business year, and 90% of the developers would be working on cloud products in the upcoming business year.

So, I felt like, “Okay, they have not missed the boat in the cloud. They are really taking it seriously.” So, I felt very comfortable buying Microsoft at the time, but it was still a company at a very low valuation. Probably, I would have not purchased at a different price, like 15x or 18x earnings.

Why Andreas is a generalist

[00:29:11] Rob Vinall: I think that’s an important lesson, and a lot of younger managers think they have to sell themselves as having a specialty in a particular market to their investors. Oftentimes, it’s a small-cap focus or in a particular geography. Would you place any such restrictions managing your own money in terms of which size of company or sector of company or place of the company?

[00:29:32] Andreas Lechner: I would not. Definitely not. I invest globally and across all market cap categories. I think a lot of people take this research too seriously that says that small caps outperform large caps over the long term. I think the dividing line is most probably not small caps versus large caps, but owner-operated companies versus non-owner operated companies. Just because large caps are large and old, usually they not as often have a dedicated owner or an owner-manager as the small cap has. I think this causes mostly the return difference, not the fact that they’re larger or that the others are small. With regards to geography, I mostly focused on markets where I spoke the language or where the companies published English annual report.

[00:30:32] Rob Vinall: If you looked over the course of your development, you went through lots of different transitions. Started with a technology focus, maybe then moved away from that after the Dot-com Crash, and moved back to it. Are there any other similar sorts of transitions you’ve been through in terms of type of company or sector?

[00:30:52] Andreas Lechner: What I’ve increasingly flocked to was companies where I just admire what they’re doing. So, a company I’ve admired for a really long time was Google. In 2011, I added Google to my portfolio, and that investment was something I really liked to do because I liked all of their products. I was using them daily. This is something I want to continue. Invest in companies that get me excited about what they’re doing. I look for that in every business. Some kind of excellence, some great entrepreneurial achievement or some technological breakthrough that they have mastered or at least something I can really, really admire.

If possible, as few things as possible that I don’t admire. What gets me very skeptical if I go to the home page of a software company, let’s say, and it’s not working well. If they don’t get their own home page working, how can I infer that their products will be working well? Something seems off at that point.

Excellent companies

[00:32:11] Rob Vinall: I think Steve Jobs made a similar point on Apple, that the inside of an iPhone should look beautiful as well even though a customer would never see it.

[00:32:18] Andreas Lechner: Exactly. Excellent companies usually are excellent from all perspectives. It’s rare that I find a company is excellent from reading the reports, looking at the products, and so on, talking to potential customers, and then meet management and I’m disappointed by them. That’s almost never happened. I can hardly think of any instance where this happened.

[00:32:43] Rob Vinall: That’s fascinating to me that you started as a sort of a nerdy kid with a fascination with relativity theory, and have kind of come to the point where admiration, which I guess is more of a part of the emotional brain rather than the scientific brain becoming such a big factor for you.

[00:33:00] Andreas Lechner: Right, that was a bit of a difficult transition. The most difficult part I found was judging managements. For a long time, I was meeting with managements and coming away with a rather good impression, these are good guys. I had to consciously readjust that and said, “Okay. If I come away with a good impression, it means they’re average.”

[laughter]

I want to come away with a really, really, really impressed, then they’re good.

[laughter]

Investment decisions

[00:33:39] Rob Vinall: Yes. Like me, you work on your own, or more precisely, you make investment decisions on your own? We both have very broad networks which overlap to a certain extent. Maybe you can talk about, what do you think advantages and disadvantages are of making investment decisions by yourself?

[00:34:00] Andreas Lechner: The advantages is that you are not biased by anybody but yourself. It’s hard enough to fight your own biases, but if somebody whom you have a very high opinion of tells you that the stock you are really excited about is not good or is even a short and he would never put money into that, for a long time, I didn’t have the emotional stability or the confidence in myself in my own judgment to withstand a statement made by somebody I consider senior to myself in terms of his experience, in terms of his track record and so on to say, “Well, I disregard his opinion.”

I’ve come to learn to just take his opinion for really the facts that he tells me, and check the facts, and only regard the facts. Not the fact that he is a great investor or that he is a great person or something. If he tells me something of value about my company, something very specific which I can proof or disproof, I consider that, but I would not consider a blanket statement like, this company, he would never invest in, or this is a bad market.

Tesla

[00:35:25] Rob Vinall: I think that was a lesson you learned through Tesla. Maybe you want to talk about that?

[00:35:28] Andreas Lechner: Yes. I liked Tesla from a very early point in time. 2011 or ’12 I came across it and I really liked what they were doing with the Model S and the engineering breakthroughs they had here and how it all came together, strategy and financial innovation, like having the customer pay upfront a certain percentage. If you look at how its engineered, how it all works together, it was always said from the classical car companies, you couldn’t build an electric car. It wouldn’t work. It wouldn’t have a long-range and so on.

They just improved on aerodynamics, which was possible because it was electric. It didn’t have all the air intakes that were causing the aerodynamics to be bad. From every perspective, it was a great company. I never purchased it though because, financially, they were not as stable as I wanted them, and I felt like the risk-adjusted returns were maybe not–

[00:36:30] Rob Vinall: I think you also said some people who you looked up to kind of put you off as well?

[00:36:35] Andreas Lechner: Exactly. Yes, that as well. There are so many people who told me they would never invest in anything with four wheels.

[00:36:42] Rob Vinall: [laughs] Yes, just an anecdote. I held a get together I think about six or seven years ago at my home for some investing friends. I asked everyone just to present an idea which they thought was going to be the most valuable company in 10 years’ time. Andreas Lechner’s idea was Tesla. You won that competition.

[laughter]

[00:37:02] Andreas Lechner: I still admire the company and what they’re doing and still don’t own the shares. I missed the boat when they were below $300.

[00:37:09] Rob Vinall: Yes. Looking forward, which are other areas where you think you can change and develop, or which–

[00:37:18] Andreas Lechner: Yes. First of all, evaluating managers. This is something which is still a work in progress. I think I’ve improved there, but it’s something that can still be improved. Some other area is software tools. I try to develop some systems for myself to streamline my research process and my information gathering.

Biotech

[00:37:45] Rob Vinall: I think also you’ve spent time on the biotech sector, which is a sector a lot of value investors dodge. Where did you get to that? I know one of my friends in the audience here is a big fan of biotech. He’ll probably enjoy your answer.

[00:37:57] Andreas Lechner: Yes, it was an effort in looking at sectors that have not that many value investors looking at. Maybe, I could find some value there looking at it from a value perspective. I signed up for online courses and tried to learn a bit more, but it’s still a work in progress. I’m in this business for the long term, for the next decade. Let’s see what will come of that.

[00:38:25] Rob Vinall: Do you think the sector will ever be investable for you? What’s your gut feeling?

[00:38:29] Andreas Lechner: Probably not every company in that sector. There may be a subset of companies that I one day think would be investable.

Other opinions

[00:38:37] Rob Vinall: One question I wanted to come back to was, you talked earlier about how on the other hand, you had to abstract yourself a little bit from other people’s opinion, especially people you perceived as a senior. On the other hand, I know you enjoy networking with a lot of other investors. A lot of investors seek your opinion. How do you kind of manage those two conflicts, or that potential conflict?

[00:39:09] Andreas Lechner: As I said, I just consider the facts that people tell me about companies and try to ignore this potential seniority or how well I like them. If the facts are right, I would consider them, and one should always be open-minded to conflicting information that one gets from anywhere. Always be a bit not too sure in your own judgment. This is important but also not be so insecure as to easily adopt somebody else’s opinion just because he’s senior to yourself. Just try to force yourself to look at the facts and come to a rational conclusion.

[00:39:52] Rob Vinall: I guess that’s easier to do when you’re working on your own.

[00:39:56] Andreas Lechner: I think so. Absolutely.

[00:39:59] Rob Vinall: Okay. I know that’s going to be– Sorry.

[00:40:01] Andreas Lechner: Maybe one should not discuss new investments before one does it with your friends, because, it would really bias yourself.

[00:40:09] Rob Vinall: I never tell anyone before I invest in something for that reason. I know there’s going to be a lot of questions from the audience. Let’s make some time for that.

[00:40:19] Andreas Lechner: Please.

Biases

[00:40:21] Rob Vinall: We’ve got Dan on the internet in case there’s any questions coming in from that angle. I’ll come back to you.

[00:40:29] Participant: Hey guys. You already talked about biases quite a bit. I will be curious–

[00:40:36] Andreas: From which company?

[00:40:37] Rob Vinall: Biases, biases.

[00:40:38] Participant: Biases, yes. I would be curious how both of you manage your own biases in your investment process. Thank you.

[00:41:00] Andreas Lechner: I constantly ask myself if it could go wrong, how would it go wrong potentially? Look at the risks. Are they real? Is management telling the truth? If they say they have superior products, don’t just take that for granted. Try it out yourself. Try competitive products. Also, go to the internet, maybe find a forum where some people who actually use the products on a daily basis discuss and see if what the public story of the company matches to what the experience of the customers is. Maybe reach out to a few of these members in the forum, send them some private messages through the forum. That is very helpful. Not to easily accept for granted what they tell you.

[00:42:06] Rob Vinall: Everybody has biases. You can’t avoid them. Whichever ones we have on balance must be more positive than negative. Otherwise, you wouldn’t have had the performance you’ve had.

[00:42:14] Andreas Lechner: Yes. Even though there is certainly a fair degree of luck involved in everything I was doing, if you think of the 1990s, the history would have looked completely different if the stock market had not been as exuberant, or Bijou Brigitte, it was conceivable at the time I invested in it, it would maybe return 17%, so a 7% dividend yield plus a 10% growth, but it was completely unforeseeable that growth would suddenly accelerate to 35%, and the stock would go from 7 PE to a 20 PE. It looked like a very good position, otherwise, I wouldn’t have put 30% in it. How good it would be, I vastly underestimated.

[00:43:04] Rob Vinall: Luck is always a big factor.

[00:43:05] Andreas Lechner: Yes.

[00:43:07] Rob Vinall: Okay. There’s a couple of questions at the front here, and at the back.

Quantitative investing

[00:43:09] Participant 3: Hi. Very impressive career. I wanted to ask you, given your mathematical background, ever thought about automating some of your investment process? Quantitative investing is a big theme, I know it’s been down a little bit, but is it something you’re thinking about it, or maybe combining the two approaches, qualitative and quantitative?

[00:43:35] Andreas Lechner: No, that’s not an area I’m thinking about. I’m a very focused investor, I’ve always been, and even now, I have six positions in my portfolio. So, there is not that much to automate. You can spend a lot of time on any of these six positions. I think where one can automate a little bit is– or one can create some tools on how one spends one’s time, on what companies one spends time so to alert yourself when something new comes up so that you don’t have to look through the news every day but, something pops up when something interesting happens. I think in that area, I would rather try to automate and/or create information gathering tools that help my fundamental research, but not so much to–

I actually believe that you should focus on one investing strategy and do that really, really well. I was discussing with Rob the other day, “Could one have just continued investing in old economy kind of companies?” He said, “Well, probably the returns would be a lot lower,” I said, “Well, maybe you would have to build a whole strategy around that, maybe you would not be investing in developed markets, but you would be investing in developing markets where the internet penetration is a lot lower.” He would look to develop markets, how many years before they are disrupted, the companies in which you invest in.

You would develop a consistent strategy with your own mental models and your own tools, and it could have worked as well. You have a clear strategy, and strategy always means doing some things and consciously not doing others. I think you should not mix styles, you should just aim at one strategy and focus on that and trying to become really good at that. Implementing a Corn strategy in addition to a value investing strategy I think just destroys your focus. I’m not saying Corn strategies cannot work or anything, just, you need to focus on one thing.

[00:46:00] Rob Vinall: Make a decision, yes.

[00:46:00] Andreas Lechner: Yes.

[00:46:01] Rob Vinall: Okay, I do.

Portfolio construction

[00:46:03] Participant 1: Thank you for coming to speak to us, Andreas. I’ve got two questions, please. The first question is–

[00:46:07] Rob Vinall: Do you mind just taking the first one, and then let him answer, and then you can ask the second?

[00:46:09] Participant 1: Sure. The first question is, can you talk a little bit about how you think about portfolio construction? You were talking about positions that were 2/3 of your portfolio and 30%.

[00:46:22] Andreas Lechner: I think portfolio construction has to be seen in conjunction with the quality of the companies that you own. In this case, I had two-thirds of my portfolio in a payroll software, a company focused on the German market. The churn rates in payroll software are super low, maybe 1% a year.

[00:46:44] Rob Vinall: Companies like their checks to clear at the end of the month. [chuckles]

[00:46:47] Andreas Lechner: It’s super sticky, and it’s something they don’t want to mess with, because, as Rob says, the paychecks have to clear every month, and the company was expanding nicely, and so, I felt like if I was not taking undue risk. I would think about it differently if this was some shaky business where, I don’t know, in textile or raw materials, or something where you don’t quite know how they will fare a few years out. It was a very, very predictable and safe company.

[00:47:22] Participant 1: Maybe if I can push back slightly, how did you decide in that specific case, that 2/3 was the right number for you rather than say 40% or?

[00:47:33] Andreas Lechner: Well, I had a lot of cash burning a hole in my pocket from selling Bijou Brigitte a couple of years earlier, and it was available at a really good valuation. I sold 8x EBIT. I didn’t see a big risk in doing that, and I wanted to be fully invested or close to fully invested, which I’m still, and always try to be fully invested a lot of time in the market.

[00:47:56] Participant 1: Thank you. The second question, the last one.

[00:47:59] Rob Vinall: A bonus question but a quick one then. [laughs]

Time allocation

[00:48:01] Participant 1: It’s very quick. How do you allocate your time split between thinking about the companies that you currently own and new ideas?

[00:48:09] Andreas Lechner: Yes, that’s a very insightful question. I spend most of my time on my current investments, on the companies I already own, and try to disprove them, try to find holes in the thesis, and read about what new comes out and their new products, and then the strategy, and their competitors and so on. I don’t spend that much time on finding new investments. If you give me a portfolio of 10 companies and a lot of time, I would rather narrow that down to 5 companies than to expand it to 15 companies. I would just look at these 10 companies, which of the 10 are the 5 first ones?

[00:48:56] Rob Vinall: I think Dan’s got a question from the internet for you?

Manage external money

[00:48:58] Dan: Yes, it’s probably one we’re all thinking. You must have friends and family that want you to manage their savings for them. What do you tell them?

[00:49:08] Andreas Lechner: No, actually not. My mom invests her own investment portfolio, and she doesn’t listen to me.

[laughter]

[00:49:27] Rob Vinall: If you think moms are difficult, wait until you try your children? [chuckles]

[00:49:34] Andreas Lechner: No, I–

[laughter]

[00:49:37] Dan: Maybe I will rephrase the question on behalf of the questioner. After this interview, you are likely to have very many people who are going to be asking you to manage savings for them, what would you say to them?

[00:49:49] Andreas Lechner: No, I want to be focused and mostly to my own portfolio.

[00:49:58] Rob Vinall: Maybe I can rephrase–

[00:49:59] Andreas Lechner: It’s also a matter of focus, if you have 50 investors that you’re talking to and that take up your time, and then you need employees to manage all these relationships and all the admin that is connected to that, it would defocus you from your main activity. I want to stay a single person managing basically my own portfolio, and not build a classical money management business where lots of client relationships are involved and all that.

Quality investing

[00:50:34] Participant 2: Hey, Andreas, it sounds like from the beginning of your career, you had a very good instinct for investing in quality companies, you were also able to buy them at very attractive valuations. Could you talk a little bit more about how you think about valuation, maybe cases where you passed because valuation was too high, even though you liked the business or cases where you had to be creative and getting comfortable valuation on a very good business that’s highly valued?

[00:51:04] Andreas Lechner: I think it was rare that I overpaid for a quality company. I much more often made the mistake of compromising on quality where I should have been picking the better company for a higher valuation. I do not do DCF models or any of that sort, I just try to have a rough idea where the company would be 5 years out or 10 years out, and then do a back of the envelope valuation in my own head. That has served me well so far.

I want to spend my time rather understanding or making sure that the company is really there where I expect it to be in five years. This is where my focus should be, making sure that my assumptions are right, because if the assumptions are off, it can throw off the valuation much more than whether the multiple is 10% higher or lower, or 20% higher or lower. I do not go for extreme valuation. The most extreme thing I did in the last few years was buy Facebook in 2014 for 40x earnings or something–

[00:52:09] Rob Vinall: How much?

[00:52:10] Andreas Lechner: 40x.

[00:52:10] Rob Vinall: Four zero?

[00:52:11] Andreas Lechner: Four zero, yes. But, that was just one investment at the time, and at the time, maybe 13% of my portfolio. It was still a very long runway for very high growth rate, so it was clear that multiple could drop a lot and I would still do well with the company. I still own Facebook by this day. I increased it last year.

Facebook

[00:52:40] Rob Vinall: Probably a question everyone is wanting to ask but are too polite to is, if you don’t mind saying, which is your largest position today, and what percentage of your portfolio does it make?

[00:52:48] Andreas Lechner: It’s Facebook and it’s 28% of the portfolio, and I feel very confident with that.

[00:52:56] Rob Vinall: I thought we were going to get through the whole meeting without talking about Facebook but, [laughs] blown it at the last. Dan, do you have any more questions from the internet or is there any more in the room? At the back there.

[00:53:10] Konstantin: First of all, Rob, thank you again for hosting this event. It’s a great pleasure and worth the trip no matter where you’re from. Thank you so much.

[00:53:18] Rob Vinall: Thank you, Constantine.

[00:53:20] Konstantin: Yes. I had the great pleasure to attend some meetings together with Andreas and PSG at Pete’s office was an example some years ago. Another example was at Connecticut, at Interactive Brokers Headquarter, and I can attest that Andreas really has a very independent thought process, because we were already invested and that didn’t interest you very much, but at some stage I got a call and you said, “Now I’m invested as well.” I just wonder whether we will have a Bijou Brigitte experience in this case.

[laughter]

[00:54:01] Andreas Lechner: It’s not as cheap as Bijou Brigitte was at the time, but I think they will do rather well. I’ve been a customer of Interactive Brokers for 12 years, and I wouldn’t know where to go to if they didn’t exist. There is no other broker that covers as many markets and is as cost-competitive. If anything, what I don’t like about them is that they sometimes say we don’t do something even though I would be very willing to pay a fee for that service. They have a few blind spots, but overall, it’s a really great experience, it’s a really great broker.

[00:54:39] Rob Vinall: I think we’ve got time for one last question, so just on the back there.

[00:54:45] Konstantin: No one said TikTok before, and I think it has been the fastest-growing company ever, and clearly, a competitor with Instagram. I wonder, what are your main thoughts on it.

[00:55:04] Andreas Lechner: Yes, they are in a similar business, TikTok specializes in 15-second videos and has an AI algorithm and you can rate how you like that video and then the AI will show the next video based on your historical likings. TikTok currently has, I believe, somewhere between 800 million and 1 billion users, and it’s a Chinese company, very popular among teenagers. Yes. To a degree, they compete against Instagram, but Instagram is growing very fast. It’s currently still bigger than TikTok and something one has to watch. It’s also something, by the way, that gives me some comfort in that politicians and the regulations will not destroy Facebook because, if they destroy Facebook, somebody else will take their place.

If this somebody else is TikTok, how would it be if Congress has some questions to the CEO of TikTok? Would they also come to Washington and testify in front of Congress and promise to spend billions in fixing these problems? I think not, so that gives me at least some comfort on the regulation front.

[00:56:22] Rob Vinall: I think a lot of Liberal-leaning people are anti-Facebook, but there’s an alternative universe where MySpace would have been the dominant social network. Basically, an affiliate of Fox News, so you have to be careful what you wish for. [chuckles]

[00:56:37] Andreas Lechner: Right. I consider Facebook as a tool and people should just– or children should just be educated to use it in a competent way. To use it to their advantage, not to waste their time on it and benefit the most out of it. It should be regarded as a tool and not as something that is good or bad. There are two billion people on Facebook. More than two billion people and not all of them are good people, and, of course, not all of them are bad people, but you read in the press mostly about those 1% of bad people and bad things happening on Facebook and nobody writes about the 99% of good things happening there.

[00:57:18] Rob Vinall: We clearly see that the same way. Andreas, it’s been a real pleasure to interview you. We’ve spoken so many times, this is the first time in public. I really enjoyed it. Thank you so much.

[00:57:27] Andreas Lechner: You’re welcome.

[applause]

[00:57:32] Rob Vinall: Before you go, Andreas, also for you, a copy of my favorite book of this year.

[00:57:37] Andreas Lechner: Oh, thank you very much.

[00:57:39] Rob Vinall: Okay. Thank you. It’s ten past eleven, so we’re running a little bit behind schedule, but maybe we’re-

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Tilman is a very enthusiastic, long-term investor. Over the last years he has taught himself important investing concepts autodidactically. He tries to combine a positive climate and environmental impact with his investments.
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