Robert Vinall, what is currently my biggest challenge? A Q&A

Here you can enjoy the transcript of a Q&A with Rob Vinall of RV Capital. It gives you insights into Rob’s investment approach.

This transcript is part of a series of transcripts of the talks at the RV Capital Meeting 2020. Before the RV Capital meeting takes place again in March 2022 we want to make these great and relevant conversations also available in form of a transcript.

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Introduction

[00:00:10] Robert Vinall: This is the part of the meeting where you guys get to ask me the questions you want to. All and any questions are welcome. Don’t worry about asking any difficult ones. The only thing that I can’t guarantee is that I answer all of them.

This is my favorite part of the meeting. I love talking about my companies and getting to hear what’s on your mind. I think last year, it felt at times like 70% of the questions were about Facebook. And Facebook was the best performing stock in the portfolio last year so there’s obviously a lot of wisdom in this crowd. So I’m curious about which areas are going to be the focus this year. So any question is welcome.

One small caveat, tomorrow, the entire day is going to be dedicated to questions around starting a fund, how I got started, and the types of questions you should ask yourself before starting a fund so I would save those questions for tomorrow. And then one final point, I had the great privilege, last autumn to have dinner with Charlie Munger, which was a wonderful experience. One thing which I noticed though, the format was very much like a Berkshire Hathaway shareholder meeting where I got to ask Charlie a question and then he would respond, and then the next person would ask a question, he would respond and there are a few occasions where I would have loved to have pushed back or added to what he wanted to say and I don’t want to make that mistake with this meeting here.

So, there’s no obligation to follow up to my response but if there’s something you want to add or push back on, that’s fine. Obviously we don’t want to get too caught up though on just one question so at some point I might just suggest we take the question offline at a later point, but I just want to encourage people to push back if they want to. So, with that, let’s get into the Q&A.

Who wants to ask the first question? While hands are going up, maybe I’ll just say as well, I think Nate mentioned that there’s are a few questions from the internet. So we might do a kind of like a two from the room, one from the internet type thing. We’ll see how we go. Great. Who wants to go first?

Building conviction

[00:02:20] Question: Hey Rob. My question for you; a lot of the businesses, or a significant chunk of the businesses in your portfolio, I would say it seems like you’re underwriting a specific underwriting skill at the underlying portfolio company and so I was wondering if you could talk about how you build conviction in the underwriting skill of something like a Credit Acceptance or a Grenke or a PSG, and then how you would think about re-underwriting that in a moment of succession?

[00:03:00] Robert Vinall: What a wonderful question. I’ve never really thought about it in those terms but I think you’re absolutely spot on that there’s a strong level of underwriting of a lot of the businesses. For those of you less familiar with insurance parlance, underwriting refers to when you make a decision to allocate capital to a business, the underwriting process is the one of deciding does this risk makes sense, is the return sufficiently high? If I think of Credit Acceptance, the business you mentioned, they obviously make decisions about consumer loans, in Grenke it’s on business loans, PSG who we just saw, obviously Piet’s main job is deciding which of the businesses should get capital which is always scarce.

And I would answer the question in two parts I would say. I think you have companies which I’d put PSG in that bucket; maybe AddLife as well, where there’s a handful of very big infrequent decisions. So Piet, probably, I would guess only makes one or two big capital allocation decisions a year if even that. And so, for something like that, I think understanding the character and the ability of the individual is absolutely crucial. And then if I contrast that with say a Credit Acceptance and Grenke for example, they’re making 10s of 1000s of loans every year. And there obviously has to be a system in place, which can just sort of crank out those underwriting decisions in a really an automated way. So obviously, you want to have a sense that that process works, that the process is protected by entry barriers. So if I think about Credit Acceptance, the wonderful thing about that business is the way they ask the dealer to participate in the risk of the loan.

t’s really an incredibly powerful idea because it’s very difficult to replicate, because the dealer doesn’t get the check up front, the dealer might only get the check sort of three years down the line. In which case, they really have to have confidence that Credit Acceptance is still going to be around in three years. So when a startup comes along and says hey we want to copy Credit Acceptance, you just have to kind of say, don’t worry my check’s going to clear in three years. Obviously dealers are very skeptical and I think nobody has really managed to replicate anything like Credit Acceptance’s business plan.

So there it’s more process-driven, I would say. But even there as well, no matter how good the process is, it’s only as good as the people who are running it and believing in it. And there it’s absolutely crucial that you have a strong culture where people believe in the process, where integrity is writ large, where it’s a feedback mechanism to the CEO in case things are going wrong or if things can be improved. So even there as well, having said how important process is, I would say the people is by far the most important thing.

Succession in a business

[00:06:09] Question: On the succession point, so for the PSG-type businesses obviously you’re focused on succession of a few key individuals but what about for the process and kind of monitoring is that eroding or is it, maintaining its strength over time?

[00:06:28] Robert Vinall: Generally for businesses?

[00:06:30] Question: For Credit Acceptance and Grenke specifically, where you’re trusting a process to make your underwriting decisions but as the world changes, the process has to change as well.

[00:06:42] Robert Vinall: Let me take the succession part first and then come back to your second part of the question. And if I miss it, feel free to say so. So succession is a kind of an interesting one for me because when I’m looking at a new business, I think I would never invest in a company which has a relatively new CEO. That’s not because some new CEOs don’t turn out to be superstars, every great CEO at some point was a new CEO I guess, but I just feel its way outside of my circle of competence of some shiny sort of graduate from Bain or Goldman Sachs or whatever decides he’s going to turn his or her hand to managing a company. They might be great, they might not be, I just don’t feel like I bring anything to the table in understanding that. So, as a rule, I’ll only ever look at a very seasoned CEO; in an ideal situation, a CEO who’s the founder of the business, or at least dedicated a very large part of their lives to that business.

Now the one exception to that would be in the case of a succession. So we’re at some point, for example at PSG Piet’s announced he’s got a new guy who’s going to run the business, I would hope it’s someone internal, I’m assuming it’s someone internal who has spent a lot a lot of time there. I would for sure give that person the benefit of the doubt. In fact, we had the situation with Grenke where Mr. Grenke stepped back about two or three years ago, and he was taken over by Ms Leminsky and that was a situation I felt very comfortable with. So I would say as a rule, it has to be a very seasoned CEO. But in the case of succession, if I’m invested in the company and love the company, I would for sure give them the benefit of the doubt.

And then, I’m not sure I got 100% the second part of the question but on process, obviously the world and technology, and stuff doesn’t stand still so the competitive dynamics and all this kind of stuff is permanently in flux and obviously as an investor, you want to be underwriting those changes and making sure you’re keeping an eye on, and thinking about them. But the reality is there are so many things happening in the world, there are so many smart people starting businesses being innovative. I think it’s very, very tough to really judge that. So I would say from a bigger picture point of view, what you want to be thinking about is the moat or the competitive advantage underlying that process, is that kind of moving, is that widening? Is it getting better over time or is it kind of deteriorating? Because even if it’s a very small rate of deterioration that’s going to be a big problem if you want to be invested in the business forever.

I kind of use the analogy of two rowers on Lake Zürich and they’re in this sort of race and one rower is miles and miles behind the other one, but he’s going very, very fractionally faster than the guy in front. Now, in a very long period of time, obviously, he’s going to catch up and take over. You might not know when but you know for sure it’s going to happen. So, what I would really look to is that the moat is widening.

And how can you tell if the moat is widening? I think some businesses as they get better, the moat widens. Amazon for example on logistics and pricing power and stuff. I think about portfolio. To stick with the example of Credit Acceptance, they’re gathering more and more data, the relationships with the dealers are becoming more longer. The dealers understand the product better and they’re more incentivized to keep working with it so I would say those are examples of businesses where the moat is getting wider and that’s probably the most important thing. Does that answer the question? Great, I saw a thumbs up.

How Robert Vinall expands his circle of competence

[00:10:48] Question: Hey Rob. Jack’s question actually brought to mind a question that I’ve had for you which is, and this is Nick Hyatt with UVA just to introduce myself. Question is I’ve noticed over time, how your circle of competence has expanded. You started investing primarily in German companies and then you expanded to more global businesses and more recently, you’ve added acquisitive companies to your to your portfolio and noticing that a shortcut you had used historically may have become less relevant given that your circle of competence had, I think, expanded. And so my question for you is, are there places today, you are learning and maybe seeing that your circle of competence is expanding in places you’re focusing on, or are there shortcuts? For instance, the shortcut to not invest in new CEOs that they could maybe one day becomes less relevant for you and your portfolio.

[00:11:58] Robert Vinall: That’s a great question. Thank you. I’m just thinking actually while people are asking questions, whether someone wants to move the camera around just so we can see who’s asking as well. No? Okay then that case, my technical guru says that’s not possible, sorry for the people on YouTube, I can promise that there are actually people in this room. I’m not a schizophrenic.

I’m going to answer the question in a bit of a roundabout way first and then come back to it. Recently, I’m embarrassed to say, it took me so long to get around to it but I read, Nicholas Taleb’s book called “Antifragile. And in there, he talks about, kind of making mistakes as being a great source of information. He actually specifically mentions the example of the Titanic where you have obviously an awful tragedy but probably contained information at the time about how big a boat or ship should be built, and then that feedback mechanism meant that probably saved a lot of lives as well. And so I think as investors, we tend to view mistakes as kind of something to be avoided, to the extent they do happen, it’s kind of okay, so, so.

Taleb in “Antifragile” argues, actually mistakes are something you should actively look out for, because they contain information, but obviously they shouldn’t be mistakes that in any way, cause long-term harm. And if I relate that back to your question on circle of competence, I think there’s a sense that you should never ever go beyond your circle of competence, but I think you should always be testing the edges of it. And to the extent you do test the edges, you’re inevitably going to every now and again, go beyond the circle of competence and provided that doesn’t kill you, then I think that’s, that’s a great thing to do. How on earth are you supposed to expand your circle of competence if you don’t ever push the edges a little bit? And so I think it’s something I’ve unconsciously always been as an investor is trying to expand that circle of competence.

When I started out, I was working in a small German bank in Germany and I think the first five years of my investing life, all I ever looked at was German, small-cap companies and if you look back at the business owner fund when it started, nine of the 10 companies were small-cap German stocks and there was like a 3% position in American Express or something like that. But I was basically there and obviously if I fast forward today, it’s much more diverse geographically. It’s also much more diverse in terms of the sectors that I’m invested in. I think that sort of expansion of circle of competencies is super important. But it has to be obviously done it in a way where, to the extent you make a mistake; it’s not going to kill you and so that’s really important.

In terms of areas where I’d like to kind of expand more, I think it’s to be honest if you think about this, imagine a stock exchange with 1000 companies and you would have the ambition to sort of take all of these 1000 and divide the great managers from the bad managers, I’m almost certain if I tried to do that exercise, the result would be completely random. I don’t think I’d be better than average dividing that up. And that’s the reason I wouldn’t, for example, start trying to analyze every type of manager. I’ve discovered for myself, a niche of managers, where I think the odds are just massively, massively stacked in my favor. And that’s managers who’ve kind of turned the business into their life work. So oftentimes they’re the founder, but sometimes they’re just people that have spent their whole career there. Sometimes they might even be someone that arrived a little bit later but clearly buys into the culture in a very powerful way.

And that is the kind of the pool that I fish in. I think it’s a very, very rich pool especially for a concentrated fund like me. I have 10 stocks I don’t need to have a view about all 500 stocks in the S&P or 10000 stocks elsewhere. That’s not an area where I push my circle of competence, I would say, but where I certainly would, would be into areas which are new geographies. So places like China and India I’m very interested in. I have certain skepticism as a non-Chinese speaker, how good am I going to be investing now but I think that skepticism is good; hopefully it protects me from mistakes. At the same time, I think it’s an exciting market I’d like to do more. So places like that, I’d like to expand into. And I love also discovering new sectors as well, you know, so in my most recent letter, I described the macadamia farm.

Obviously I’m not going to invest in a farm or a farming business but I do enjoy understanding the economics of how businesses or businesses which are new to me work and so that will also be an area of circle of competence expansion.

So we’ll take the on from Alex and then maybe one from Nate and the internet.

Selling

[00:17:10] Question: Could you talk about what leads to a sell decision and particularly what I’d be interested on is price, like let’s say Wix doubles tomorrow, nothing else changes. What do you do? You said it was worth $200.

[00:17:26] Robert Vinall: I’ll maybe answer generically about when I sell, and then maybe come back to Wix a bit later or afterwards. For me, I’ve had two types of sale decisions in my career. The first type was where I was super enthusiastic about the business, thought everything was going exactly as I hoped it would but then the PE all of a sudden, seemed a little bit too high or whatever. Whenever I saw that type of company I always regretted it afterwards. Any of those companies which I sold, for example, Hermle, it’s a small-cap German stock which I sold because I thought it started looking a bit expensive and I think it’s up about five times from where I sold it and it’s also paid about a 10% dividend yield as well. Whenever that type of sell decision I’ve really regretted, the ones where I felt the business is really not as good as I thought or there seems to be a big risk on the horizon which I hadn’t thought about when I first invested, whenever I’ve sold something for those reasons, I’ve generally not regretted it.

So if I look back at the fund, I owned Hawesko which was a wine distribution business I thought it wasn’t properly cognizant of the risks and opportunities from the internet and I sold that. I think the share price is probably roughly today where it was when I sold. Baidu as well as an example of a company which, when I invested I probably thought it was sort of like a Google-type business and in reality it probably wasn’t. Those are the two types.

And then the second part of your question is about relating that back to price and specifically to Wix, I wrote in the letter I thought it could be worth 200. What I do if tomorrow it was trading of 200, right? Well first of all I think that’s a high class problem to have. It’s not the thing that keeps me awake is that things double-quick more quickly than I hoped, that would be fine. But I think, relating what I described about keeping great businesses and then putting that into a valuation framework, what I wrote in the letter was, I assume, I think about 25% growth in Wix up until 2024. And then of course I assume stability and then I discount that back and I got to 200. Now in a year’s time, with any luck, there’d be a decent perspective that it can continue growing after 2024, maybe to 2025. In which case, if I assume those same 25%, all things being equal, that stock will be worth another 25% because their earnings power goes up by 25%.

I think there’s kind of a mathematical rationale to holding businesses. And also the other thing I would say is when I invest in a company, I’m kind of hoping for a 15% return per year, over five years so double every five years. And if the double happens in year three, assuming everything goes well, which is of course not always the case, but assuming it were to happen in year three and then maybe you kind of have a flattish performance in years four and five and then hopefully that the compounding starts again. I think that’s fine. If you want to build long relationships with companies and not be trading the whole time, I think that’s a financial sacrifice worth making.

Holding the holding company versus owning the underlying subsidiaries

[00:20:52] Question (Internet): One about PSG. How do you decide to hold the holding company as an investment rather than looking at owning the underlying subsidiaries?

[00:21:04] Robert Vinall: That’s a great question and when I thought about it a lot, as I’ve had the privilege to meet a lot of the guys who run Capitec and it’s an incredible business. And when I invested in PSG, I probably spent more time studying Capitec than PSG because Capitec is actually where most the value of PSG is, at least seen through today. But it was an easy decision to invest in PSG rather than in Capitec because what determines the success of the Capitec investment will always be what happens at Capitec, I think that’s obvious.

Whereas a PSG, they will participate to a large extent, in whatever good things happen in Capitec. But the rocket fuel on top of that is you have someone like Piet there, who can take the excess capital out of Capitec out of any of the other areas, and reinvest it into the Capitecs of tomorrow. So I think it should turbo boost the returns of PSG, even versus Capitec. So in the last two years, that hasn’t been the case. Capitec’s share price has done has done better than PSG. But if PSG functions well as a holding company which I think it will, then, I’m pretty sure on an economic basis in 10 years’ time, PSG will do better than Capitec and at some point that will be reflected in the share price as well.

Meetings with managers

[00:22:38] Question: Hey Rob. I’m Dennis Hong from Boston. My questions revolve around your interactions with management, and the meetings. I’m just kind of curious how often do you aim to meet with your management teams and what do you hope to get out of those meetings? And then the second question on a related question to that point of management meeting. What are some of the most thought-provoking, most illuminating questions that you might ask to a manager and what are some of the interesting responses that you’ve gotten over the years?

[00:23:10] Robert Vinall: I’m not very good on multi-part questions because I always forget the second one so I’ll take the first one first and maybe I’ll ask you to the second one. So I think it was what I look for in managers was the first part.

[00:23:20] Question: How often do you meet with them and what do you hope to get out of those meetings?

[00:23:25] Robert Vinall: So, the research phase for me is very intense in terms of contact with the managers. So there would typically be lots of telephone calls, at least one in-person meeting, in the case of PSG I think there were two before I invested, and that period is very sort of intense. But once I’ve made the investment decision, I’m quite happy to let them run. I don’t want to be too interfering. I make a promise to myself and I guess to my investors as well that I visit the companies at least once a year to check-in, see how things are going. So, I would say subsequent to the investment it would typically be an in-person meeting about once a year and then I would normally, after the quarterly results, I would do a call as well just to kind of see how things are going and that kind of thing.

The really interesting part of your question is, what do I kind of look for? There I think I do something which is a little bit different to what I see a lot of my peers do. So, if I’m sitting in on a meeting where there are other investors in and they have the manager in front of them, what I find is they tend to ask questions about the business and the competitive advantage, and the growth plans and all this kind of stuff. And I think those are important questions to ask and they’re ones that I would for sure make sure I’ve figured out the answer to before investing. But if I have the opportunity to sit down with a Piet or one of the other CEOs of the companies, those aren’t really the questions I want to discuss because I’m sure Piet has been asked a million times, what the competitive advantages of Capitec are or whatever so I’m just going to get an answer which I could have got from pretty much anyone.

So what I really want to do when I sit down with a CEO is to try to figure out how they tick, what motivates them, how they think about the business, what their long term plans are, what the story of the company is, how it came to be the way it is because understanding the past is often the best way to understand what the future. So I would really spend a lot of time on those types of topics. And it might well involve talking about stuff which is unrelated to the business. It will oftentimes as well be in non-business situations so it might be going for a walk or meeting at my home or something like that, so the location would typically be non-business related as well. So I would say those are some of the things I do. And the single most important thing I look for though is whether I like the person.

And it seems like a strange answer for a value investing or any kind of economic scenario because you’re supposed to be very objective in making investment decisions or any kind of financial decisions and stuff. But I think as human beings; obviously we started evolving 100000 years ago on the savanna. And I think whether you like someone contains an enormous amount of information in terms of how we made it, survival on the savanna and that kind of stuff. It tells you whether those person’s values align with yours, whether they think about business the same way as you do, whether they treat people fairly. It contains all of this unconscious information. And if you ignore such a rich vein of information, I think you’re missing an incredible opportunity. So I would say that’s the key thing that I actually look for.

Robert Vinall’s on thought provoking questions

[00:27:00] Question: And then do you have any thought provoking or illuminating questions in your interview toolkit? And what do you often typically get as an interesting response or have you heard of any interesting responses from those types of questions?

[00:27:14] Robert Vinall: To be honest, it’s not really my style. I don’t think there are any magic questions out there and if they were they would be asked so many times that the CEO would think up a good answer to it and then it would lose its value. So nothing spontaneously springs to mind, but what I really do, if you were to sort of sit in on me with a meeting and many of the people in this room actually have done that with me, I’m just a curious guy trying to figure out what the business does. And I just sort of see where the conversation goes and try and understand.

Oftentimes when you’re new to business, there are things you don’t understand like how do they sell? What makes the product special and all that kind of stuff? So I’m just really just trying to understand, understand, understand, a bit like at the macadamia farm as well. And then out of that, new questions come up and you start building a mental model of how the business works. And so that’s kind of the way I go about things. But I don’t really have any magic questions and I sometimes cringe when people say what keeps you awake at night and this kind of stuff. If you’re in a meeting with me please don’t ask that question.

False positives and a person’s alignment of values

[00:28:28] Question: Maybe a direct follow on from the internet cue; going back to the question about what you’re looking for and wanting to have some sense that you would like the person and the alignment of values. Have you experienced personally any false positives where the charm and charisma of someone has overwhelmed, otherwise bad behavior or lack of alignment, lack of business acumen?

[00:28:52] Robert Vinall: So, I’m not looking for kind of charisma. I think that’s maybe some of the mistakes people sometimes make is, if someone shows up in a Ferrari, in a very nicely cut suit and white teeth and a firm handshake, this is my kind of guy. That’s really not what I’m looking for. I’d prefer it if someone is a little bit, kind of scruffy and introverted. I wouldn’t necessarily say I’ve ever been hoodwinked by charisma, writ large. In fact the opposite – that kind of turns me off a little bit. But I have made mistakes in judgment, and one that springs to mind is a German company called Hornbach Holding, which is a DIY business in Germany, a bit like Home Depot in the US.

Hornbach is owned by the Hornbach family. They’re the major shareholder and it’s Mr. Hornbach who runs the business and he’s been in the business forever. He clearly loves him very much. And he’s basically the kind of guy I like to invest in, and indeed did invest in, but it didn’t work out as well as I hoped. The company has a huge amount of cash on its balance sheet and then even issued debt to have even more cash, so nearly half the market cap was cash or something. And that doesn’t bother me. I know a lot of people say well that seems very, inefficient but I kind of quite like it when companies have reserves. And then when opportunity comes along, then it’s great to have financial strength when others don’t. In the case of Hornbach, they had this cash for 10 plus years and then the financial crisis came along and some of their competitors went bankrupt and you’re like, okay, now is the moment now you can put the cash to work. And he didn’t. And to my knowledge, he still hasn’t.

I think he’s a great guy, but he has a very wide shareholder basis made up of family members and my sense says, and I hope I’m not being unkind to him, but my sense says his biggest fear in life is screwing up. You hear these terrible stories about how businesses can get screwed up in the third generation and stuff. And so what I thought was a positive attribute and his high stake in the business and long-term view, actually in hindsight, I think it was sort of preventing him from making good capital allocation decisions. And that was the reason, that was a company I owned many years, I sold it, 5 plus years ago.

And that would also be an example of a company I didn’t regret selling and where I think I got the management underwriting wrong. But having said that, I don’t think I’ve ever, at least not to date, including investments that I’ve sold ever invested in a manager way it turned out to be a huge fraud and I don’t think it’s even come close.

And I don’t think that’s because I’m so talented. I think it’s because I pay attention to it. For example, Piet mentioned earlier, Steinhoff which was a Stellenbosch company which does seem to have been managed by a crook. And when I first went to went to Stellenbosch I asked a friend of mine what he made of the Steinhoff guys. And his response was, these are guys that I wouldn’t give my wallet to. And then he told me some anecdotes about how they’d been using private jets to ferry family members to various sporting events and all this kind of stuff. And as soon as I heard that the deal was off. I’ve never even visited Steinhoff, let alone, considered investing in it even though it was right next door to PSG.

So I think just by kind of paying attention to are these guys crooks or not, I think you can dodge a lot of bullets. And you might then ask, well, if it’s that easy, why don’t other people do it? And I think it’s because they just don’t really pay attention. Even worse, I think they might even view those characteristics I described as even maybe being a bit positive. Some people maybe have this mental view of the world that it’s tough out there and there are a lot of crooks and it’s better to, you can’t avoid the crooks so you may as well have the best crooks on your side. This guy, Markus Jooste, who runs Steinhoff, I think people knew he played hard and fast with the rules but they actually liked it and they actively sought it as opposed to actively trying to avoid it. And so I think that’s actually something that’s worth bearing in mind.

Credit Acceptance

[00:33:35] Question: Hi Rob. Thank you for hosting this great event. I really appreciate that you so openly answer our questions. My question is about insider trading at Credit Acceptance. I noticed that a couple of insiders sold a bit of their stake over the last one or one and a half year. For example, Brett Roberts the CEO, sold I think 3% of his stake and Tom Tryforos and Mr Newsome, board members and important investments, they sold about 8% of their stake over the last one, or one a one and a half years. So I would be interested in whether you know or whether you have an idea what their motives are, whether it’s because they want to diversify or whether the stock is maybe overvalued? So, I would be interested in your view on that.

[00:34:44] Robert Vinall: It’s really something I wouldn’t pay too much attention to, to be honest. I remember when I started out in investing there were these websites which tracked insider buying and selling and I used to follow those as a way to generate ideas. But I really don’t think it’s worth paying attention to. And even if it was, it’s just so much more important to form your own opinion rather than worry too much about what other people are thinking. Because who knows why they did that? In the case of CEOs they often have to sell to meet the tax liabilities, out of their option programs.

Tom Tryforos is someone I know very well. He has a very deep connection to the company. If you tell me he sold 8% of his stake then I can tell you it probably means that a very large portion of his net worth is still in Credit Acceptance. So it’s really something I don’t think about and pay too much attention to, to be honest. You have to have your own opinion. If you don’t have your own opinion, you’re always gonna panic when the share price is down and stuff. I know Tom quite well. I wouldn’t even ask him why he did it if I were to meet him. It’s his own personal business.

Clearing misconceptions about a company’s value

[00:35:54] Question: Hi Rob. A question about the fund constituents stocks; it’s been pretty stable for about two years until now, correct me if I’m wrong I don’t remember.

[00:36:04] Robert Vinall: Do you mean the investors in the fund?

[00:36:06] Question: No, sorry, the holdings. The holdings have been pretty stable. I don’t remember anything been sold since Novo and I don’t remember anything being bought since PSG, I think until Wix.

[00:36:18] Robert Vinall: Okay so I’ve caught you out because you clearly haven’t read my most recent letter.

[00:36:22] Question: Skims, yeah.

[00:36:30] Robert Vinall: I can always hide the $100 note in the letter when I send it to Brian; I know it’s going to be safe.

[00:36:38] Question: So you decided to buy Wix, presumably it’s because you thought the return in the appreciation of the valuation will be more than the average of the rest of the fund components. This time it seems from the way you answered a question earlier about it, that you’ve got a four and five year horizon on that. In the past, you would be speaking in terms of a stock you’d be happy to have in the fund, maybe lie in a coma for 10 years and wake up and basically you would still be happy with that position. With Wix, what do you see its moats are really and, if I’m right why only five years and then the connection with the moat, really?

[00:37:34] Robert Vinall: Thank you for asking that because hopefully I can maybe correct sort of a misperception. When you value a company, you just want to kind of figure out, in an obvious way possible, of whether that’s cheap or not relative to what you’re paying. And sometimes you can just do that on this year’s earnings. So let’s say you find a stock trading on a 15% free cash flow yield and you think it should be trading on a, say 5% or whatever so it’s worth three times what you’re paying, then you could just stop the valuation exercise there, but it doesn’t mean to say you’re not thinking about what happens in years 2, 3, 4, 5 and 6 or whatever.

I think the reason I chose a five year kind of DCF on Wix was simply because there was no need to go any further in the future to justify the price that I paid. But for sure, I have a view on it, clearly I hope it’s going todo really well far beyond 2024 and beyond. I wouldn’t say that that’s an indication that I’ve suddenly become more short term in my thinking. Did you want to push back on that?

So I described earlier how important it is that companies have a widening moat or an increasing competitive advantage and I think Wix is a perfect example of that in all kinds of respects. Competitive advantage increases over time as a rule when there’s positive feedback loops. You’re doing something and because you’re doing it you’re getting better, because you’re getting better, you’re doing more of it and so you get into these positive feedback loops. Wix has tons of those. One of the ones that I like the most is they make software to make DIY websites. So you can imagine, especially in the earlier days it was a very simple tool to get content published on the internet. But if you need additional functionality, so let’s say for example you’re a restaurant and you want to take bookings on your website, a perfectly reasonable use case and you can’t do that on Wix, then clearly you would then go to a professional website builder and say hey I would like to get restaurant booking functionality can you program that for me? And then it would probably be done on WordPress. But Wix tracks very closely, which websites aren’t being completed on its software and the reasons for it.

So at some point I guess they kept seeing all these restaurants that started building their website on Wix and then kind of abandoned the process and then they reach out to them, what was the functionality that we were missing? And they say, hey we really wanted to take table bookings on our website. And so over time, it kind of adds, and then the percentage of businesses which can complete their website on Wix increases over time. And that’s really been the development of the company over the last 10 years. They’ve added more and more functionality, more and more verticals, so industries like restaurants or hairdressing saloons or fitness instructors, you name it. Adding the functionality these types of businesses require, so they’re able to convert more and more of their users to Wix customers.

So it’s an amazingly powerful feedback loop which feeds the product development pipeline. But it even goes further than that because obviously if you’re able to convert 20% of the people that click on the Google link to your website building software and your competitor who has less of the verticals or less of the functionality is only converting 15%, then you could bid more for that Google AdWords and win more customers which feed back then into more data into your product development roadmap. So you have all these kinds of flywheels working in the same direction and there are many other ones I could probably mention as well. So it’s a company where I really feel I’d be amazed if the moat wasn’t substantially wider in five years than it is today.

Are you happy with the answer? If you want to, you can say.

Rob’s experience on what he looks for in managers and a company’s culture

[00:41:54] Question: So my question touches on the culture and succession. It’s obviously finding a great manager who has invested a large part of his life and dedicated a large part of his life to the company, it’s great. But what kind of features do you look out for? Based on your experience or testimony, that this culture permeates deeper than the top layer of management, what kind of features do you go out for?

[00:42:20] Robert Vinall: In terms of the manager, there are not actually specific features I look for because there are all kinds of subsets from managers that could have completely opposite characteristics. You have someone like Steve Jobs, who has this reputation of being very hard driving, shouting at people, all this kind of stuff and then the other end of the spectrum you have people that are very humble, understated, almost introverted. It’s not like I’m looking for a set of characteristics in the CEO and it doesn’t really matter what they are. Because to the extent they’re the founder of the business and the business has become successful then it’s because of those particular characteristics in combination with that company that it’s become successful.

But the interesting part of your question is then okay but how do you check? It’s in the culture of the company. And there I think there’s actually quite a fairly simple way to go about doing that. A culture in a way is a like an operating system for a company. So it’s like, if a company has a culture, or a certain way of doing things and then something happens, an interaction with a customer or when making an investment decision or whatever and it’s not in any kind of rulebook what the employee should do, but by referring back to the culture, they can kind of figure out what the right thing to do would be. Then you know that the culture really permeates the organization. So the way to find that out in practice is just to talk to people in the in the company, in the organization. Not with any particular agenda in mind, just about what they do in certain situations, how they think. And then you can find out pretty quickly whether the culture permeates an organization.

I thought a great example of that was actually, I visited Amazon, three or four years ago and I just met the investor relations guy. Jeff Bezos was unfortunately, otherwise occupied. He apologized. And I asked what I thought was a really good question. Unfortunately I don’t remember what it was and I thought I was going to stump the guy. And it was in fact the question he hadn’t heard before, but then he just sort of went back to first principles, okay, what would the customer want? And you could see he was going through this sort of mental checklist of what would the customer want and what would be the best thing to do and he basically from first principles, from the company’s culture, got to what I thought was a really good answer to that question. I thought that was a great example of where you can really see that the culture permeates the business.

I also feel that a lot when I go to Credit Acceptance as well. It’s a business where they’re in a very tough business lending subprime auto lending. They’re just permanently just trying to get a little bit better every time; take a little bit of cost out, make processes a little bit more efficient. And there as well, you see just these permanent feedback mechanisms in the company of sitting down, of talking, of setting priorities, of improving things, and then next week, going back and doing it all over again. I think you do feel when you spend time at the company talking to the employees, whether the culture is real.

Thoughts about the competitive set: Wix, Shopify and Squarespace

[00:45:28] Question: So this is a follow on to the questions about Wix, maybe digging down a layer or two deeper. It’s a fabulous business up but they also compete against some fabulous competitors like Shopify, Squarespace, it’s a big TAM, they are all well-capitalized businesses trying to attack it. How do you think about the competitive set and Wix’s position to gain incremental share among an otherwise very innovative set of competitors as well?

[00:45:55] Robert Vinall: I think I would push back a little bit at the premise of that particular question. So I think if you were to go back 10 years ago, there were tons of really big successful companies which had some kind of web building software. Adobe had a tool, Microsoft had a tool which was bundled in Microsoft Office, Google had a tool, all kinds of other companies as well. In Germany I know there were a lot of local players with tools and stuff and a lot of them have just fallen by the wayside because you just have this relentless pressure to improve in order to be able to convert customers. And so, a lot of the supposedly strong competitors over time have really fallen by the wayside.

But if I relate it back to those companies in particular, I would say the standout company in those three companies you mentioned is Shopify, which is obviously a fantastic business. The good thing there from a Wix shareholder perspective is there’s really not very much overlap between the two. So I think Wix have said that that type of retail ecommerce is about 5% of their subscriber base. And if it’s a very small business that maybe started with a regular website and wants to add a little bit of ecommerce functionality, then that might be a good Wix customer. But to the extent someone starts out, planning to do an ecommerce website then I would say that they’re far better served by Shopify.

I spoke to the Wix guys about Shopify. They think very highly of the company, they really don’t want to compete with Shopify in that ecommerce space. But like I said, I don’t think there’s too much overlap. And then the other two companies you mentioned which was Squarespace, I would say these companies, especially Squarespace, it’s smaller, it’s much more US-focused it are much more focused on the design vertical. I would say there’s plenty of space for more than one player in this market, but I would feel much more comfortable being a Wix shareholder than for example, a Squarespace shareholder.

Ethical red lines around gambling, alcohol and fossil fuels

[00:48:10] Question: Hey Rob. You could find a really capable management team who are honest and they have a business that’s got a great culture and the business has outstanding unit economics and dominates this market, etc, etc. But I wondered if you may have some ethical red lines that you’re unwilling to cross. There’s a long laundry list of sectors and businesses that attracts negative ethical questions from fossil fuels, firearms, gambling, whatever it might be, how do you think about that?

[00:48:46] Robert Vinall: Thanks for the question. It’s something I do think about a lot and there are a few sectors that I would never invest in. And what I kind of think about is that, am I excited to be an investor in this business? Do I like the people running it? And so if the business is, kind of in my view, unethical, then I’m unlikely to be excited to be invested in it and I’m unlikely probably, to like the people running it. So that would be really out of bounds for me. And the big ones there which I would, for sure avoid are gambling. I think it’s a terrible thing. It’s shocking that it’s so pervasive in the UK, I was over there at Christmas and almost every second TV ad is for gambling. I wouldn’t ban it because it would go underground, but I would make it as difficult as possible for people to gamble. I would only permit shops in seedy, out-of-town places where you have to really go out of your way to get there. I would forbid any kind of advertising of it. I think it’s a huge mistake that UK is making in allowing that sector to thrive.

And there’s a few other sectors as well which I’m not particularly keen on. The one exception to that list of yours, which is, and probably some people might have a different view of this but I’m just gonna put it out there. With this whole ESG trend, this idea that people that produce fossil fuel are somehow immoral or unethical. I find that frankly disgusting. We rely on fossil fuels, not just for energy but for fertilizer, for food for the tractors that drive the farms and stuff.

If these people who put their lives at risk to drill for oil in dangerous places were to suddenly say, okay forget it, I’m not going to do it anymore, our society would grind to a halt and we would all starve within probably a week, and the people that sort of take a high moral stance that these people are somehow unethical and doing the wrong thing, I don’t share that. I understand that the climate is reaching a tipping point and we need to reduce our reliance on fossil fuel, but that’s up to us as individuals to do that. Let’s not blame the people that put their lives at risk to find fossil fuels. There was a slight clap there. And no booze, I have to say.

Wix’s compensation of revenues

[00:51:08] Question: Rob, you’ve spoken in the past about how alignments are more important than a financial incentives for managers. So, this pertains to Wix. I think we found our new Facebook. So the question is, their stock compensation runs 10 to 12% of revenues, so where in the spectrum between incentives and alignment does that lie, and more, I guess lower level, I think you mentioned roughly 30% free cash flow margin, how does this top compensation play into that because that’s a really expensive business?

[00:51:42] Robert Vinall: Thank you for drawing the tension between the difference between alignment and incentives. I think it’s an important one, which people oftentimes miss. So there’s this sense that incentives are kind of unbelievably powerful and I think Charlie Munger said something along the lines that he’s understood incentives better than anyone else on the planet, and even he underestimated them. I only agree with that point to an extent. All the times you see incentives, kind of misfiring it’s always in the negative, where people do something completely wrong and irrational; because for some, the incentive program was misconstrued and as a result of that, they did this sort of really bad behavior. The flip side though that people actually do great things because of financial incentives. I really struggled to think of any examples where that’s the case.

If you think about a sportsman like Roger Federer serving for the final set of Wimbledon to win the championship, I’m pretty sure that the prize money is not top of mind in that situation, and I think it’s true for great managers and regular employees as well. They achieve great things when they love what they do and they feel they’re being fairly compensated for it. I do distinguish between an incentive and an alignment. But your question was more around Wix in particular and if there’s one aspect of the investment case I’m less keen on it’s that the management don’t have particularly large stakes in the business. They have significant stakes but not the very large ones that I find in some of my other businesses. As a result of that, I think for them, the stock-based compensation is a kind of an important component of creating that alignment to the extent the business does really well and they can participate in that. So it’s something I’m slightly less keen on.

But that being said, there are a lot of other positives that far outweigh that. And then in terms of valuation, you’re right to point out that stock-based compensation is a component at the moment. I think there are a few things to bear in mind that the business is still hugely profitable. Free cash flow is something like 27% yield including stock-based compensation, if you take stock-based compensation out it’s 3 or 4%. So, there’s a big Delta. But I think they’re investing about 30% of revenue or even a bit more than 30% of revenue in marketing and that kind of stuff and costs which are investment in nature rather than just to keep the business running.

So I think, even today and even excluding stock-based compensation, you’re still getting pretty close to that, 30% free cash flow margin on a steady-state basis. And of course overtime, you have to invest based on what you think the future is gonna look like not in the present and it’s still a very young fast-growing company. Over time as it becomes a little bit more mature, you would expect and hope that the stock-based compensation becomes a much smaller component and that’s kind of what you see everywhere. If you look at Facebook, five years ago, I’m sure you’ll find that their SBC was much bigger than it is today, and ditto for companies like Google and stuff.

Raising humble, financially responsible children

[00:55:04] Question: Hi Robert, thanks for having us again this year. So my question is not about investing, per se. So with each passing year, I kind of have more and more money and I look at my kids and I kind of wonder.

[00:55:18] Robert Vinall: That’s what happens if you keep putting one foot in front of the other and you spend less than you earn.

[00:55:25] Question: The thing that worries me the most is I now have two kids and I want to raise them to be responsible, humble people and not spoiled by the money they probably are going to see in their life, I wonder what are the big decisions you make in your life in raising your children, which you think one should pay attention to, so that they actually become responsible. Thank you.

[00:55:53] Robert Vinall: My daughter’s looking at me as you ask that question. I really think there’s only one thing you can do as a parent if you want to create those types of outcomes and that set the right example. I think children don’t pay too much attention to what you say to them, but they do unconsciously copy the behaviors and the things you do. And so, if you want your children to grow up humble and with proper respect for money, I think the only way to do that is to demonstrate that yourself. I’ve had the fortune, through my work to meet a lot of very, very wealthy families and their children, and what I’m amazed to see almost every time, is just how humble, and down to earth, the kids are. And the reason for that I think is simply because that’s the way the parents live.

They have regular cars, they live in regular houses, they take regular holidays, the kids go to regular schools, and so it’s just second nature to them. It’s based on what they’re experiencing versus what their parents are telling. But as I was answering that question, it occurred to me that when I had dinner with Charlie Munger, this was one of the topics that had the most attention. There was a couple of other guys in the room who had been very successful venture capitalists and it was very much top of mind for them, how to stop spoiling their kids. There was an interesting discussion because Charlie said, you have to give your kids lots of money because if you don’t, they’re gonna end up hating you.

Olivia prefers Charlie’s answer to this question. I think his exact words were if you kind of artificially trying to keep them poor they’re just going to end up despising you. It was interesting because afterward, I was reflecting on that response with some of the other people who were in the dinner. We came to the conclusion that it reflected on the environment that kids are growing up in. So in the case of Charlie’s kids, they were growing up in LA, which is a very polarized place I think between rich and poor. And if you’re in this very rich environment and all the kids are driving Porsches and are going to private school and you send your kids to the public school and don’t give them a car and stuff, understandably, they’re going to be excluded from their social circle, and that will probably be a very unpleasant thing for them and they’re probably gonna end up hating you.

But I would contrast that to bringing kids up in, for example, Zurich where we both live, or Germany which is where a lot of the families, I’ve learned are. And there you have a much more kind of egalitarian sort of society where the kids all go to the same public school, there’s not such a big difference between rich and poor neighborhoods, the families themselves, even if they are rich tend to kind of hide their wealth or at least not show it off. So maybe there’s a different opportunity for people like us, as wealthy people bring their kids up in Zurich or in Germany than say in LA.

Rob’s readings and search for new opportunities

[00:59:23] Question (Internet): This is one that came from the web. How do you prioritize reading or doing work on new businesses versus the businesses that you own? And how has that allocation of time changed over the years?

[00:59:39] Robert Vinall: So, what I’m most excited about is actually learning about new businesses. And what I found over time is what works best for me is doing the thing which I’m most excited about because then I’m enthusiastic about it and motivated to do it and that kind of stuff. So I would say quite a large part of my time is actually on reading and studying new businesses. And that’s also partly because, once I’ve really sort of made up my mind to invest in a company, I’m really not waking up every morning and rethinking that decision. I know there are some investors that advocate every morning you should mentally assume your portfolio is 100% cash and then each day reset it anew.

That’s just not my style because if I were to do that, then obviously the portfolio would be turning over like crazy and I wouldn’t be able to build these long relationships that I that I want to build. I guess I probably spend much more time on new business than the older ones. But in terms of the old businesses I obviously read the quarterly reports, more out of curiosity than I really expecting to change my mind. When new kinds of risks or opportunities come up, I like to discuss those with my fellow investors and with the management of the company, and like I said, I visit the existing investments at least once a year, I speak to them several times a year. So that’s kind of how I would allocate my time, I would say.

The relevance of websites

[01:01:05] Question: Hi Rob. My name is Isaaf, I came all the way from Israel. Wix’s headquarters are next to where I live and I’ve known the company for a long time. So the question is obviously about Wix. I was wondering, actually, even before you bought it, we had a model for the company and we try to compare what the set of assumptions that you took, compared to our set of assumptions, and it was funny to see that in year 2024, Wix will actually under your assumptions, we have to hit another week of 2019 in order just to maintain that in the same rate of growth and all this while on the backdrop, you can see that maybe sites or websites are becoming less popular when you have Facebook pages and maybe other solutions like apps for your phone and I kind of feel that maybe there are some vectors that going in the opposite direction maybe websites are becoming less popular and then you actually have to, in order to maintain the same rate of growth, you have to make actually maybe make them more popular, so I was wondering how do you actually view the TAM, the total investable market and how it develops with time and what do you think it will be in five years from now.

[01:02:25] Robert Vinall: So my sister is looking at me. She runs a social media marketing agency so she might want to make a comment on to what extent people still want to have websites. But I’ll let you think of your answer and I’ll maybe respond first I would take those forecasts as directional as opposed to kind of the point, as long as things go very approximate in that direction, I think the investment will work really well but don’t hold me captive to them exactly. But as you correctly say, I have a 15% subscriber growth which means that doubling every five years so, in five years’ time, it should double versus where it is today. And I think at the moment they’re adding about 800000 new users a year so 800 times five, that would be the 4 million so I think it’s not completely unreasonable but we’ll see what happens. But in terms of TAM and stuff, I think there are a few things to bear in mind. The website costs like $15 a month right, and you throw it up in a few hours. Even if 90% of your clients were on Facebook, which I’d love as a Facebook shareholder but, unfortunately, I don’t think it’s the case, even then there it would probably still be worth having your own website, just so you don’t miss out on that other 10%.

And I think a website as well, it’s a calling card. It shows you’re a serious business, a bit like how perhaps in the past, having an office signaled you’re a serious business even if perhaps you didn’t necessarily need one. So I think there are lots of reasons to do it. And also, like I think I mentioned earlier, it’s also not just a website with content. Nowadays oftentimes it’s kind of a tool to manage the business with reservations and all that kind of stuff for restaurants, it has chat functions if you want to communicate with customers because people hate picking up the phone nowadays, so if you have a chat or that kind of stuff. So I think there are lots of reasons why people will continue to have a website.

[01:04:20] Question: Also, we find the first thing when we look at a client now if they want to come to us and do like Facebook advertising or social media marketing, the first thing we now look at is their website. Because we use the website as a lead funnel as a lead generator because people are more likely, we find, to leave their contact details through a website than they are through a Facebook lead form. And the leads that we see coming through websites tend to be more genuine and thought about than people just quickly clicking on Facebook. So I still find websites to be massively important. I can’t see it not being something that would be phased out, personally.

[01:04:58] Robert Vinall: I think actually I would almost argue that things could go in the opposite direction. Google is under a lot of attack in Europe because a lot of the companies feel they should be featured more prominently in Google search results, whereas increasingly Google serves up the direct answers people are looking for. And so the thrust of regulation in Europe is that these companies should be more prominent in Google. And it’s kind of instructive to compare that with China. In China, the dominant companies, in my view correctly, have gone the complete opposite route.

They forbid Baidu to serve or to scan their websites and serve results onto the search engine; because they want they want the customer directly. They don’t want to pay a tax to Baidu to win the customer or to serve the customer. And so, if I was running one of these businesses which are suing Google and want to be more prominent in the search engine, I would actually advise them to go the complete opposite route and to really try and force those direct relationships with clients rather than the other way. Of course having a website or an app is the best way to build a direct relationship and not have it intermediated by a Facebook or a Google. I say that as an investor of both Google and Facebook.

Special characteristics of SaaS business models

[01:06:24] Question: Hi Rob. Just a question on SaaS business models. As you looked at Wix were there any particular characteristics of SaaS business models that had you kind of, sort the wheat from the chaff, customer attention, the nature of the market address because clearly they have really powerful business models and that’s why they trade so highly. So maybe if you were comparing a Wix to an Avalara or something like that that’s a very specific, sales tax type SSAS model. If you were doing a deep dive in that sector, what are the particular characteristics that you might look for in finding opportunities in that part?

[01:07:08] Robert Vinall: Yeah, for sure. It tends to be the case that all SaaS companies get thrown into the same bucket and they all get this sort of 10 times revenue sort of bandied about and stuff and the reality is there are huge differences between SaaS businesses. So from my perspective, by far the most important feature is whether the customer, or rather the revenue churn is positive or negative. If you lose revenue over time through customer churn, then, obviously that’s a much worse business than one where just every year without you doing anything, that revenue just keeps coming in. So I think that’s a very important difference. I also think the gross margin of the SaaS business is also an important feature. In its core business, Wix has over 80% gross margins, so pretty much a large part of that revenue gets converted into cash flow for shareholders.

Wonderful though Shopify is as a business, big part of their revenue is through payments and payments is quite a low gross margin business. So a Shopify dollar of revenue is for sure not worth as much as a Wix dollar of revenue. I have a lot of friends invest in Shopify I think is a wonderful business, no need to remind me of that. But that’s for sure a difference. So that’s how I think about it. But the big point about SaaS businesses in general, which I really love, is the alignment between the company. Like I described with Wix, the better the product is the better it is for the customers and so it just really aligns beautifully.

And that’s the case for a lot of SaaS businesses actually, whereas historically, the software has been like just attritional warfare between the customer and the company. Oracle, would lock you into its database software, and then at the end of the quarter, if the sales guy hadn’t made his numbers he sort of dropped by and say listen, there’s a 10% revenue price increase, otherwise, we’re going to cut you off. And so customers then had to swallow the bitter pill and there was real hate between Oracle, and its customers. And in SaaS, it’s actually the complete opposite. The number one goal of a SaaS business is to reduce churn, and the best way to reduce churn is to have happy customers. So you have much more of an alignment and I think that’s a really powerful flywheel for the sector as a whole.

Charlie Munger’s opinions on China

[01:09:28] Question: Hey Rob. Thanks for hosting. Question about your meeting with Charlie. Did you talk to him about China at all? I know he’s pretty vocal about his interest there and that conversation if you did, did it help you improve your circle of competence or increase your confidence in investing in China? And then you mentioned some follow-ups you wish you had asked him, if you could expand on any of those, I’d love to hear what you’re interested to learn from him as well.

[01:10:02] Robert Vinall: He said on several occasions during the dinner that he thinks that the future is in China and I really, really agree with that given that that’s where a lot of the economic growth is going to come from, it makes sense that that’s where the best investment opportunities are gonna come from. He speaks very highly of the fund manager who he outsourced his capital to, Li Lu I think his name is. He mentioned Li Lu several times. I think the way Charlie thinks about China is that at a high level he thinks it’s an amazing opportunity but the best way to address that is through someone who’s closer to the market than obviously he can be as a 96 year old. I would say his comments on China were quite high levels and not necessarily something new but it was nevertheless interesting to hear that.

And in terms of pushback, there quite a few things. Actually one where I actually did push back a little bit which was quite interesting, and I think I got a really good response was, he was saying how, and this is maybe a slight negative for Berkshire shareholders but how, even with the benefit of hindsight, he doesn’t see how going back five years, how Berkshire could have beaten the S&P 500, given in its sort of sweet spot of the type of businesses it likes to invest in. They’ve sort of underperformed the market, given its size constraint, given the amount of capital, it has to invest. And given that it wouldn’t invest in sort of FANG type stocks.

And I did actually push back to that response because I said, well Charlie over five years ago, you spoke incredibly highly about Google and as far as I can judge, you seem to really have a great understanding of it so are you really sure that was outside of your circle of competence in hindsight? And his response was actually quite sweet. And he said, Robbie, you have to understand, I don’t even have an iPhone. So I guess, maybe it is a little bit outside of his circle of competence if you don’t have an iPhone. But I guess that’s what a humble guy he is and he has this amazing understanding. But just because of something simple like not really interacting with an iPhone and being familiar with that kind of stuff.

Rob shares his greatest challenges as an investor

[01:12:35] Question: So, a simple one but an open-ended one. What is currently, your greatest challenge as an investor?

[01:12:47] Robert Vinall: I think it’s the greatest challenge is, like we’re almost at the beginning of January today and no matter how great last year’s performance was or the last 10 years performance was, every year you start back at zero. And not only do you start at zero, but you have new investors coming on who have absolutely zero benefit from what happened in the previous 10 years and are only interested in what happens in the next 10 years. So you really just can’t sit back as an investor, and the things that worked over the last 10 years by definition, aren’t going to work over the next 10 years because capital markets are very efficient. As soon as something, an opportunity crops up people are under it very quickly and so you really have to just sort of be thinking things through from first principles, every day, at the start of every year. You just really can’t sit back.

I think that’s the challenge on the one hand, not to become complacent, obviously. But, also to actually think of new things you can do. I think I’ve spotted, over the last 10 years some inefficiencies in the market, particularly focusing on these people who can make businesses their life work, maybe switching to some tech type companies, earlier than the value investing community as a whole did. So I think I found things in the past to do differently which helped the performance but the game starts afresh, every day and that won’t help for the next 10 years so you just have to keep trying to think of new ways to do things and find opportunities.

Balancing and maintaining independence and exchange with other people

[01:14:25] Question: I’ve known you now for more than 10 years and one of the things that strikes me is, you’re very independent in your thinking and you don’t hesitate to give pushbacks to Charlie Munger, for example, or any idea that we actually exchange or whatever, you always have your own independent view which is essentially why I have some more money. And on the other hand, we’re all here because we exchange ideas and you actually make the exchange with other people, a big part of your life. And so my question is, how do you maintain those two areas like your independence and thinking, and this exchange with other people?

[01:15:18] Robert Vinall: It’s a great question. I would say in a nutshell, it’s really by not hiring anyone. That would be the short answer, but I can give a longer answer as well. For people that know me, I’m not a super strong personality I would say so. If I’m in a group or a team and someone’s feeling very strongly that everyone should go in one particular direction, I would probably be someone, even if I thought that I had a better idea, to the extent that person seems so kind of enthusiastic about it then I would probably sort of fall into line and do the same thing. So what I realized quite early on is if I were to hire a team of very successful and self-confident people around me then, probably over time it would be the team’s ideas, which would probably find their way into the portfolio rather than rather than my ideas.

And so that was really a big reason why I decided not to hire analysts in particular. But having said that, it’s just so incredibly important to exchange ideas with other people – like we’ve done, and a lot of people in the room here. And what I found is that if someone is a peer, so someone who’s managing their own money or managing their fund or whatever, you can have a much more open, relaxed conversation than you can with an employee. With a lot of people in the room here we’ll have talked about stocks together many times in the past and I might have had one view, they might have had another, but then everyone goes home, they build their own portfolios, they might have bought the company I liked or sold it and I’m not offended, they’re not offended it’s really very uncomplicated.

And I would contrast that if you hire an analyst and the analyst spends a month studying a company, they get super excited about it, they come to you they explain why this company is the best thing since sliced bread and then if you say, actually, this is not something I want to buy, then they’re like super disappointed but, okay, I’m gonna go back and try again. So then the next month they work super hard, they’re getting excited, they’re burning the midnight oil they find this great idea they come and present it to you and you say again, I kind of like it but this is not what I’m looking for. Now they’re actually starting to get a little bit frustrated, what is the point in all this hard work if it never makes it into the portfolio? So probably the third time they come along and say they’ve done this work and they’d like to buy something, you’re probably at that point going to fold and say, okay you can allocate a little bit. So for me, what’s worked spectacularly well is making decisions by myself where it’s just me. There’s no distraction, there’s no one that I have to kind of push back against or fight against but at the same time, having that very rich network of wonderful investors, who I can exchange ideas with in a very kind of relaxed way.

And the person I’ve exchanged ideas with more than anybody else over the last 15 years is Andreas Lechner. He’s an incredible investor and I’m going to be interviewing him tomorrow so you’ll meet him tomorrow but as preparation for our talk, we had a conversation which we haven’t really had before which was about our personalities and how we got to where we were. Andreas actually said something quite similar. One of the biggest challenges sorry if I’m actually taking some of the messages from tomorrow but maybe it sets the scene for it, he was also saying that, he finds it very difficult if someone’s a very nice free senior type person with a lot of experience, a lot of success to make decisions against that person. So I think for him as well, it’s worked well to have the opportunity to engage with other people, but also to have a certain distance as well. That’s just a little foretaste of the discussion tomorrow.

The amount of companies Rob studies each year

[01:19:00] Question: Hi, Rob. Thanks for hosting us. I’d like to ask a little bit about what’s not in your portfolio. So the question is really, how many businesses do you look at a year, and how often is priced the determining factor that you decide not to go ahead at that point such that it becomes something maybe for the watchlist or the reserves? And then maybe more generally, what do you think is the biggest factor behind errors of omission for you?

[01:19:26] Robert Vinall: So in the first part was how many how many companies I look at. I look at a lot of companies in the course of the year, but on a lot of them only very kind of quite superficially, if someone says an idea is good then I’ll start looking at very simple things like the type of business it’s in tenure of the CEO and then a lot of businesses get dismissed after less than five minutes of work, so there’s probably 10s if not hundreds of that type. In terms of ones which I really start to do much more work on, I would say it’s probably more like, maybe five to 10 as opposed to the hundreds of the more superficial type analyses.

And then the reason that I study those five or 10 is generally nothing to do with price, I most likely haven’t even valued them at that point because I probably don’t have a view on how to value them. So the reason to focus on those five or 10 is that I’m really excited about the people running the business and the opportunity that lies ahead of them and all these qualitative type of factors. And it’d really be towards the end of the process that I feel confident enough to value the business and then maybe start thinking about what it’s worth and to the extent the price doesn’t seem super attractive, then I’ll most likely just put it on the watchlist rather than invest in it. So I would say that’s the biggest trigger.

And then the second part of your question, just a quick reminder.

[01:21:05] Question: (unclear audio).

[01:11:55] Robert Vinall: So certainly, it was a kind of a misconception of how to value a business. If I go back to maybe the first five years of the fund, I kind of thought, if a business was, I know it sounds silly, but if a business is trading on 20, 25 times this year’s earnings, then it’s just not a value investment. And I mean that’s clearly just a spectacularly wrong mistake and you need to be thinking about what type of earning’s power a business is going to develop over the next five or 10 years in order to figure out whether something is cheap or not. So that was certainly the biggest source of error and one that I think I kind of corrected. But I missed some really good opportunities, especially in the financial crisis probably just because I was a little bit too hung up on paying a really low multiple. Did I cover everything, I know there were a few different parts of your question?

Just a quick note too, we’re getting pretty close to noon. So maybe type two more people have microphones. Okay, we’ll take these two and then is there anything worse on the internet? Okay, so this is the final two no pressure.

The risk of lacking conformation bias and selling too early

[01:22:34] Question: Hi, Rob. I’m James from New York. Thanks for letting me in on the waitlist a few months ago. As someone who obviously holds your managers in high regard and you have a strong sense of what type of manager you like to back and you do a lot of work in building relationships with these managers. How do you protect yourself from potential confirmation bias where you’ve already built a relationship, you have a strong rapport, but maybe the world has changed and maybe the business has changed? So to answer that maybe I’d love to hear you riff on some cases where you’ve had to make a hard decision about that where you’ve done a lot of work and haven’t underwritten yet or you’ve backed someone for a long time but maybe you’ve had to make a hard decision.

[01:23:12] Robert Vinall: Thanks for that question. So, that kind of goes a little bit into emotional biases and the one you specifically called out is confirmation bias, which is where, because you’ve said or done something in the past you kind of feel beholden to continue doing it the same way in order to be to consistent and that’s called confirmation bias. I really feel that these types of biases can be harnessed to your advantage as opposed to being viewed as a source of risk. I think I mentioned in my most recent letter that I might talk more about that in the future. But if you think about it, specifically to confirmation bias, the fear is really the people hold on to companies for too long, that they ignore warning signals when they maybe shouldn’t have. And my sense though is that although in theory, yes, that is a risk, the far bigger risk, and the far biggest source of mistakes for investors is actually a lack of confirmation bias, where they’re actually not holding things as long as they should do, where although they might plan and set out to be long term they actually end up selling a company after a few months or whatever.

And if I think about my some of my biggest mistakes, it’s actually been selling things too early rather than holding them too long. So I understand where the question is coming from but I actually view confirmation bias as perhaps an opportunity to live up to the long-term holding periods that you’re hoping to. And also in very difficult market phases where maybe stocks are under pressure and stuff, using that to your advantage to be able to ride out the storm because you have that strong confirmation bias which is sort of keeping you in there. I view it for me more as an opportunity than a risk but I agree that under certain circumstances, it could be a risk.

I’m trying to think if there’s anything I’ve held too long because I ignored negative signals. Nothing really major springs to mind. Novo Nordisk, I could have sold it much more early, but it wasn’t really confirmation, it was just because I’ve missed how important raising prices have been to their earnings growth and when that disappeared, the company obviously became much less valuable. But I don’t think it was a confirmation bias and actually I was more than happy to sell when I realized that I’d made that mistake after the share price recovered a little bit. I don’t think it’s been a major source of error but maybe that’s my confirmation bias which is hiding that information from me.

Managing stress and Rob’s great track record

[01:25:50] Question: Hey Robert, thank you for the event. So I have a two-part question about your job as a fund manager. I wanted to ask if you sometimes feel a bit stressed from investors where you have maybe a month or a quarter that’s not doing so great, where they start to speak with you, call you and ask a lot of questions? And the second part of the question is, from all the funds that I have seen over the last 10 or 12 years, you’re probably the one with the best track record that I could find.

[01:26:27] Robert Vinall: There are a few better ones out there but thank you.

[01:26:30] Question: I probably couldn’t find them. But I saw a lot of funds with a poor track record that are managing five billion, 10 billion, and 20 billion. So the question is, why you have such a great track record, and why you have not raised five billion, 20 billion, and so on?

[01:26:55] Robert Vinall: There were a few different questions in there. But the last one on why am I not managing 10 billion? It’s just not my bench benchmark for success. I know a lot of people view the best manager as being the one with the most assets under management but I really disagree with that from deep down. I think the best manager is the one who has the best track record. And having too much assets is actually really a hindrance to building a track record.

Saying no to investors and the reasoning behind it

[01:27:18] Question: (unclear audio) who want to invest in you so you have to say no to them because they don’t have enough money.

[01:27:32] Robert Vinall: I have to say no to a lot of investors for various different reasons. I don’t want to have too much capital. Some of the very large investors will say something along the lines of, our endowment is so huge; our minimum ticket size is 200 million. I don’t want 200 million from just one single investor so I have to say no to that. I have to say no also from an organizational standpoint because I don’t have any marketing personnel. If I take someone on as an investor, I’m the one who’s going to be building that relationship with them and I only have a certain amount of capacity, there’s only a certain amount of relationships you can lead. So obviously I really try to select the people I like the most and want to spend time with as a criterion. So there are lots of different reasons.

And it’s just not scalable what I’m doing, right? So, it’s only me. I didn’t plan to hire anybody else. So I’m only going to ever manage a small amount of the world’s capital and that’s perhaps also one of the reasons I’m very happy to support emerging managers because I’d much rather the money went to them, rather than some kind of hot shot New York hedge fund or fidelity or whatever. So that’s kind of how I view it.

But you also asked about stress as well which I think is an important one. And as hopefully you can see, I’m not stressed. I think my wife and children would confirm that. And that’s really because it’s a conscious decision not to be stressed. If I think there’s an investment which would make me stressed in the sense that I’d be up at night thinking oh my god is something going to go wrong, then that for me is the clearest possible signal I shouldn’t be invested in it. That’s also an example of where I use emotional biases maybe to my advantage as opposed to having them as a risk factor. So if I’m not sleeping when I think about an investment, I would clearly sell it.

[01:29:17] Question: How would you make sure you have a (unclear audio) which is doing not very well that would be better off at the start for you than putting stress on you?

[01:29:32] Robert Vinall: A lot of my investors are in the room now and I’m looking at a few of them in the front row here. And I can really say I’ve never once ever had a stress call from an investor because one of the companies had some kind of problem. It’s just never happened. And that’s obviously because I think I have selected investors who really understand what I’m doing. And it doesn’t stress me either because if I’m invested in 10 companies, there’s always going to be quarters that are bad. So if a company has a profit warning, this year and most likely there will be one of the 10 that does, it wouldn’t surprise me, I don’t beat myself up on that. Of course, there’s always going to be things that’s not an example of a mistake, it’s just a part it. So my investors have never been a source of stress.

My one small caveat would be where I do sometimes get emails; it’s from non-investors. So, people, I guess who don’t know me so well, maybe read my letters and then Facebook might be down 20% on a day, because there’s some kind of negative scandal announced and then someone, who I don’t know, will email me saying, oh, Rob, did you see the Facebook news? You could probably guess that I did see it. And then they want to know what I think. I really don’t enjoy that kind of email because I kind of think, that person should be thinking for themselves. Especially if it’s a smaller company, what I’m thinking in that moment is potentially a very valuable source of capital money for my investors, right? If the stock is down 20% and I think it’s an amazing opportunity then I want to be trading. I don’t want to be telling people what I think. And also the other way, if I think there’s a real problem with the company then obviously I’d want to be selling and I don’t want to advertise that I’m selling, so I don’t really appreciate that type of email.

I’d really advise people. I don’t mind if they use my portfolio as ideas for their own portfolios, it’s a perfectly reasonable thing to do. But they have to be clear that they’re making their own investment decision. And if there’s a problem with one of the companies, they have to decide for themselves what to make of that and whether they should buy or sell. That’s kind of how I think about it.

Ending note

[01:32:02] Robert Vinall: Great. Well thank you very much, everybody. I don’t think there was a single question on Facebook this year which is incredible when you think about it, which, doesn’t bode well for the Facebook investment but anyway. It’s a beautiful day out there. I recommend heading up to the mountain, and I’ll see you back here at 6 pm.

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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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