Rob Vinall’s Q&A: building RV Capital, Carvana, Prosus & more

During RV Capital’s Annual Meeting 2022, for 90 minutes Rob Vinall answered a lot of questions of the visitors. Here you can find the transcript.

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We have discussed the following topics:

Introduction

[00:00:00] Rob Vinall: Okay, so now it’s the traditional Q&A where you can ask whatever questions you want. I’m happy to report we have now three microphones. I’ve got three children, and three microphones, so there’s a nice symmetry there. If you want to ask a question, just put up your hand they’ll bring one of the microphones to you. 

So, who wants to ask the first question? If you want to quickly say your name and where you’re from would be great too.

Managing biases?

[00:00:28] Lauritz: Hi, I’m Lauritz from Frankfurt. I would be interested in your takes on talking to management because I think normally like a lot of value investors seem to not want to do that to preserve their potential biases and right now, after this perfect example on stage, I’m even more convinced that I am biased and not as able to make an objective decision.

A lot of CEOs and founders are charismatic and know their business well and I don’t at the beginning. So how do you handle your biases and how do you judge that?

[00:01:11] Rob Vinall: Thanks for asking this question because it’s one I feel passionate about and as you indicate there’s a lot of disagreement in the investment management community about it. So a lot of investors say don’t speak to management because they’re great salespeople. 

Like, they’re going to influence you, and you’re going to lose your objectivity, it’s best just to focus on the annual reports and what have you. That’s the perspective of investors. When you speak to businesspeople though, you get a very different perspective.

Businesspeople will always tell you it’s always about the people. You have to find the right people and then a venture either works or doesn’t, depending on who the people are. And I just couldn’t agree more. How on Earth are you going to judge whether you’ve got good people or not without actually meeting with them? So I think it’s hugely important. 

One of the drawbacks you point to, I’m not even sure it’s a drawback, so there’s this idea that you should be objective, but one of the most important skills or qualities of a CEO is they have to be likable, right?  If you are charging out of the trenches and saying follow me, people have to like you otherwise it’s not going to work, and what better way to judge whether you like someone than by just saying, “Oh, do I like this person?”

It’s an incredibly powerful thing. Liking someone as a very visceral reaction but there’s so much stuff happening in the unconscious when you do that. You’re noticing subsumes in how they handle themselves. Are they show-offs? Are they humble? How do they treat other people?

And all this stuff is happening in your mind, and you probably don’t notice it, but in the end, you have this impression, do I like this person or not? So I think it’s incredibly powerful. Like anything, there are upsides and downsides so it can of course lead you astray. 

If you like someone who turns out not to be a good person, then that could potentially lead you to make an investment mistake. But there are lots of ways to make investment mistakes. You can misjudge the size of the market. You can misjudge the competitive advantages.

But we still try and make a judgment on those things, and so why is this question of management? Why is that something where people decide they don’t want to make a judgment? So for me, it doesn’t make sense. 

Yeah, well, the microphone is coming to you. I wanted to say at the beginning if you want to push back on any of my answers or ask for a clarification that’s totally okay. 

I had the great fortune a couple of years ago, shortly before COVID, to have dinner with Charlie Munger, which was a lifetime highlight, but one of the things which was a bit of a shame was, that it was a bit like a mini-book.

So a lot of investors say don’t speak to management because they’re great salespeople. Like, they’re going to influence you, and you’re going to lose your objectivity, it’s best just to focus on the annual reports and what have you. That’s the perspective of investors. When you speak to businesspeople though, you get a very different perspective. Businesspeople will always tell you it’s always about the people. You have to find the right people and then a venture either works or doesn’t, depending on who the people are. And I just couldn’t agree more. How on Earth are you going to judge whether you’ve got good people or not without actually meeting with them? So I think it’s hugely important.

[0:04:13] Rob Vinall: She had a way where you would ask a question and Charlie would respond and then the next question came along and so I’m happy for this to be as interactive as you like.

How do differentiate between input and output?

[00:04:24] Lauritz: Yeah great. I’m happy to push back. My take would be, don’t you measure the same factor twice then? Because if I look at the company right now, I’m convinced it’s a great business model. It’s a great company that has great returns but doesn’t the great management also already show up on the runway and in the financials? How do I differentiate that? 

[00:04:49] Rob Vinall: Yeah, so it’s important to distinguish between outputs and inputs, so the output is always like financial success. Is the business growing? Are the employees happy and being retained? Is the business making money and stuff?

But that’s an output, that’s not an input, and what I would argue is probably the single biggest input is not just the CEO, but the senior management team, the culture, and the way the employees interact with each other.

And remember, as investors were trying to figure out outcomes before they’re clear. 

So the financials of the scoreboard at the end of the day will tell us, has the investment been a good one or not? But to score goals on the scoreboard you need to properly judge the inputs.

And remember, as investors, we’re trying to figure out outcomes before they’re clear. So the financials of the scoreboard at the end of the day will tell us, has the investment been a good one or not? But to score goals on the scoreboard you need to properly judge the inputs. 

Talking to management

[00:05:40] Lauritz: Okay, one last thing. When do you decide to talk to management in your investment process, a new research process about a company?

[00:05:50] Rob Vinall: Pretty early on. So I think if you want to have credibility with the management, it’s important to have a decent understanding of the business. I think any management would be very disappointed if someone shows up and the first question is, “What does Trupanion do?”

I think there are other people that can explain that Trupanion is a pet insurance company without taking up CEO’s time for that. So, I think it’s important to have formed a good opinion of the company before and learned about it and stuff. But once you’ve done that, I want to get to the CEO pretty quickly because I know that’s going to be a really important point in the research.

And if I see early on that the CEO drives a Ferrari and treats people badly and has a huge ego. Then I’d rather find that out early in the process so I could move on to something else rather than right at the end of the process. 

So I think if you want to have credibility with the management, it’s important to have a decent understanding of the business. I think any management would be very disappointed if someone shows up and the first question is, “What does Trupanion do?”

[00:06:39] Lauritz: Okay, perfect. Thank you so much.

[00:06:40] Rob Vinall: Thank you. 

How do you see your companies?

[00:06:54] Andrea: Thank you, Tommy. Hi Rob, thanks for having us. My name is Andrea, I come from Milan. I am an investor in the Business Owner Funds since 2016. So my question would be on the Business Owner Fund. If it’s not too open-ended, would you want to give us a little bit of an update on the key things that may be changed in how you see your company since you have last updated us on that, maybe I just highlighting things that were your judgment improved under companies or where you see them less favorably, and I can narrow it down more if best to open-ended? Thank you. 

[00:07:32] Rob Vinall: Yeah, thanks for being here, Andrea, and for the question. Obviously, share prices move very rapidly in reaction to the news and that kind of stuff on a day-to-day basis but I don’t think generally my opinion on companies moves on a week-to-week or a month-to-month basis.

Especially in the last three or four months, I think some of the companies have had setbacks. So Facebook is one example, was hit by some of the Apple changes, and some other factors, and is still a great business, is still growing, and still making a lot of money. But for sure there was a minor disappointment now and I think that’s been the case with some of the other businesses as well.

But it hasn’t fundamentally changed my opinion on any of these businesses. If I invest in something, then it’s because I think it’s a great business run by good people at a reasonable valuation, and I can be a shareholder for a long time.

When I make an investment, I know there are always going to be setbacks. No company is ever going to grow in a straight line. Sometimes they’re going to have positive surprises. Sometimes they can have negative surprises. And it feels like in the last few months the negative surprises are being more predominant than the positive ones. 

But nothing has happened to change my opinion on any other companies there or they’re ordering funds.

When I make an investment, I know there are always going to be setbacks. No company is ever going to grow in a straight line. Sometimes they’re going to have positive surprises. Sometimes they can have negative surprises. And it feels like in the last few months the negative surprises are being more predominant than the positive ones. But nothing has happened to change my opinion on any other companies there or they’re ordering funds.

Inflation and interest rates

[00:09:13] Ludovico: Hi Rob. Thanks for organizing all this. My name is Ludovico. I’m from Milan as well. May I ask you what’s your opinion on the macro situation we are living in? So what’s your opinion on inflation, on interest rates, and so how do you think that will affect margin? If you think we will have wage inflation in Europe? And then some general comments on this.

[00:09:46] Rob Vinall: Yeah. Value investors like me typically don’t spend too much time thinking about macro stuff simply because the one thing you learn through investing is that nobody can predict it. Nobody saw COVID coming. Nobody saw the Ukraine war coming or not many people did, but the one thing you do know is that things are always going to happen. 

So I think the correct way to invest is to buy companies that are sufficiently solid, sufficiently solving a sufficiently important problem for their customers that pretty much irrespective of what happens, they’re going to do fine because things are going to happen.

And I was speaking to Darryl about this in the car yesterday and he made a great comment which is, “If there was any piece of news that changed your opinion on a company, why would you even be invested in it in the first place?” I thought that was a great way of putting it.

If there was any piece of news that changed your opinion on a company, why would you even be invested in it in the first place?

Darryl Rawlings

You mentioned inflation and rising interest rates, and one thing that is clear is interest rates and inflation goes up and down. They were very low for far longer than anybody expected, and now they’re certainly on the rise, whether that remains the case, who knows? 

But you certainly don’t want to be caught. You want to be caught out if inflation takes off or interest rates take off. Warren Buffett wrote about inflation in one of his letters many decades ago, and he made the point that the very best type of investment in the inflationary environment is a company that is capital-light. 

So it’s a company that doesn’t require reinvesting in capital to grow and which has a lot of pricing power because then they can just raise prices in inflation. So inflation goes up 6%, the price of the product goes up 6%, so it’s basically a wash. And if I look at the companies in the portfolio, I think they’re all very well set up to do very well in an inflationary environment. 

I think it also will do well in a non-inflationary environment, so it could be quite agnostic about it. The one thing I would say is the increase in inflation expectations and interest rates over the last few months has coincided with panic in a lot of the type of company that I think is best suited to prosper in an inflationary environment.

If I look at, for example, one of the companies in our portfolio, Wix. It’s a subscription business that provides a service-building website for small businesses which they really need, you can’t switch off the website just because the prices have gone up 5% or whatever. I think that’s a business that will do really, really well in an inflationary environment.

Well, the share price has suffered, presumably because people take a different view of that, but I think that’s exactly the type of business you want to own in an inflationary environment. 

When do you take a loss in an investment?

[00:13:18] Michael: Hi and thanks Rob for giving us your time. I’m Michael from London. Your answer about the management was really fresh and unique and it’s so great to hear, and it kind of forced me to ask you this question.

If you can give some detail about being specific about a specific company. But can you give us some detail about when you take a loss in an investment? So you’ve realized that it probably isn’t working out, and at some point, you say, “Okay hand up. I’ve made a mistake.” Can you just walk us through how that works in your mind, please? 

[00:13:50] Rob Vinall: Yeah. So the question is on when to sell. I think the best sell decisions I’ve made over the last 15 years or so are the ones where I thought there was a fundamental problem with the company. Where I had to hold my hand up and say, listen, I misjudged this company, in terms of its competitive advantage, the motivation of the management, the size of the opportunity, whatever it was.

But I felt I’d misjudged that and sold. That was generally a good decision. To pick an example, shortly after I invested in Google, I think this is around 2011, or 2012. I invested in Baidu, which is the Chinese search engine and one of the things I realized after owning Baidu for a few years was that the search quality was very poor, and they were effectively mixing ads with organic search results.

So instead of showing people the best result, they were showing effectively an ad, and that’s something that destroys customer trust. That was the reason I sold the company and I’ve certainly never regretted that since and I think it was a good decision. 

At the other end of the extreme, there have been cases of companies in which I thought we were doing everything right. It was playing out exactly as I thought, but at the time it felt like the share price had gone up so much that it was no longer a good value. 

Whenever I sold under those circumstances, what generally happened was the business did way better than I expected, and I really regretted selling it afterward and there’s been in several of those.

So, for me, the biggest takeaways, the best time to sell a company, as if the company isn’t on track and with the valuation or the kind of the short-term multiples of earnings and those kinds of things to be quite careful if that’s the only reason to sell something. 

So for me, the biggest takeaways, the best time to sell a company, as if the company isn’t on track and with the valuation or the kind of the short-term multiples of earnings and those kinds of things to be quite careful if that’s the only reason to sell something. 

How long does it take to say, okay it probably isn’t working out?

[00:15:50] Michael: Can I just follow that? Sorry. So obviously everyone wants to sell one, which is intrinsic value, but at certain times certain valuations make more sense and there are times when, for example, in the case of Baidu, how long does it take, is it a year? How long does it take to say okay it probably isn’t working out the way I thought in my mind it was going to work out? 

[00:16:12] Rob Vinall: Oftentimes it’s something that dawns on you over time. Once you’re invested in something, it’s normally because you’re enthusiastic about it and it normally takes a little bit of more than one data point to really change your mind.

So it is something that tends to evolve over time as opposed to being a sudden decision, at least in my case. 

[00:16:38] Michael: Thank you.

How to cope with the fear of failure

[00:16:44] Jonas: Thanks, Mr. Rob for having us here. It’s a pleasure. I’m Jonas from Germany. I have three questions. 

[00:16:52] Rob Vinall: Do you mind just asking one so everyone has a chance and then you’re welcome to get back in the queue?

[00:16:57] Jonas: Two?

[00:17:00] Rob Vinall: You drive a hard bargain.

[00:17:01] Jonas: Okay, make it two. And I think there’s an interesting one. The first one is looking at Peter Lynch, [00:17:06 Nextslip?] after roughly 12, 13 years he gave back some money because he said, “I learned enough, I did it all. I climb a peak.” Would you see yourself at some point giving the money back giving your record of the time you already spent on the game?

And the second, the most important question and the one I’m more interested in, fear of failure. People would like to start a company or far to invest. How do you deal with that issue? You pick a stock. If you look at your returns and then the duct pressure of having the savings of people need to invest. How do you deal with and cope with that? Thank you. 

[00:17:45] Rob Vinall: Yeah, so on the first one I would answer at a high level. It’s really, really difficult to get started as a fund manager, that’s the topic we’re going to talk about tomorrow. If you’re lucky enough to be that small percentage of people who gets to start a fund, it’s really, really difficult to build a good track record. Most people don’t beat the market.

And then if you build a good track record, it’s really, really hard not for the fund to drift into mediocrity. I guess what I’m saying is, that there are ways you can fail at every point. You never get to a point where okay, it’s done, it’s successful.

At a high level in terms of how this end, I’m keen not to screw that bit up either, so it will be thoughtful. It will be planned very well in advance, and it will of course be in collaboration with my investors. But there are really two routes it can go down.

It could be that I point out that at some point in the future, Darryl mentioned 2035, certainly a very long time from today that gets defined as a point where the fund will close and that will happen in a very orderly way. 

But there’s also another alternative where suddenly my family’s money and a lot of the other families who’ve trusted their money with me. Their problem of where to invest the money isn’t solved just because I go away, and so we need to figure out what the best solution for them is. 

So perhaps there could be some form of continuity, but the focus will be on making sure that having hopefully negotiated the start and the middle part of being a fund manager that the final bit works well as well. 

And the second question was about fear of failure. That’s a really big question. Well, sometimes one of the questions my wife asked me is all this money you’re managing, how do you sleep at night? 

And Charlie Munger talks about how you should always invert a question, and I tried to use that type of fear or whatever it might be to my advantage, and I want to sleep well at night and so I tried to use that as an incentive to buy the type of companies that allow me to sleep at night.

And if there is an opportunity where I suddenly feel that I’m not sleeping well, then maybe that’s a pretty good indicator I shouldn’t be owning it. I think emotions are very much a natural part of investing. There is this school of thought among the behavioral finance guys that the ideal investor should be objective and rational. 

And emotions are just going to get you into trouble and do things wrong. I’m not sure that’s the right approach, actually. I think it’s unrealistic that you’re going to keep emotions out of investing. And like I say, I don’t think it’s desirable. I think your emotional response to things can be very helpful. 

If you’re not sleeping well at night because you own a stock, well maybe that tells you something. If you aren’t looking forward to meeting the CEO of a company because you think they’re an asshole. That’s probably also telling you something. So I much prefer the approach of accepting, acknowledging your emotions, accepting them, and trying to turn them to your advantage rather than trying to blend them out. 

I think it’s unrealistic that you’re going to keep emotions out of investing. And like I say, I don’t think it’s desirable. I think your emotional response to things can be very helpful. If you’re not sleeping well at night because you own a stock, well maybe that tells you something. If you aren’t looking forward to meeting the CEO of a company because you think they’re an asshole. That’s probably also telling you something. So I much prefer the approach of accepting, acknowledging your emotions, accepting them, and trying to turn them to your advantage rather than trying to blend them out. 

[00:21:43] Jonas: Thank you. 

[00:21:45] Rob Vinall: Did that answer your question? Great, thank you. 

The Metaverse and Wix.com

[00:21:51] Jonas Stevie: Hi. So I’m Jonas Stevie. I’m a fund manager from Barcelona. I have two questions, but you can skip one if you don’t think you don’t have time. The first one is what are your thoughts on the Metaverse? As a whole and as an investment, since one of your companies is investing in it and it will probably be or is expecting it to be a flow of income in the future. 

And the second question is about Wix. What do you think about the mention or that they mentioned that they will stop giving guidance? 

[00:22:33] Rob Vinall: Which company, sir?

[00:22:34] Jonas Stevie: Wix. That they say they will stop giving guidance because they are thinking at the moment it’s very difficult for them to see the evolution or what are the trends while it is a subscription company. So just these two questions.

[00:22:56] Rob Vinall: Yeah, thank you and the first question just reminds me…

[00:22:58] Jonas Stevie: Yes. What are your thoughts on the Metaverse as a whole and as an investment?

[00:23:01] Rob Vinall: Yeah, so let’s start with the Metaverse, which is obviously Facebook, which is one of our investments recently renamed itself to Meta and you know the Metaverse is a big focus for them. So it reminds me a lot, in the late 90s, one of the things maybe people don’t know is I was a telecoms analyst. 

A very pleasant period of my life when I was living in Frankfurt and in the late 90s, there was this incredible boom with mobile phones. Mobile phone penetration went from almost nothing to effectively over 100% over time. And then around about the time, the turn of the Millennium, there was all of a sudden this talk that it looked like a mobile phone penetration. 

It was getting close to 100%, so obviously it couldn’t really grow any further. But then this new excitement started about the mobile Internet. The first 3G. These UMTS licenses were sold and there was a lot of optimism that people would be using the Internet with their phones.

It was a fascinating period because there was a debate at the time about whether anybody needed the mobile Internet and closely connected to that debate was what is the app people are going to use or is there an app that people are going to use? So me and everybody else were trying to figure out what is the app going to be or is even going to be an app? 

Fast forward to 20 years today and it’s not like there’s one app. There are millions of apps and there are tens, if not hundreds of incredibly important ones. So the forecast back then was is there going to even be one? 

And of course, what it turned out was there were millions. So which is a long way of saying, I think that’s a good way to think about the Metaverse. It feels like where we were in the late 90s, and we’re trying to figure out is there even used for this stuff? Is it going to be something?

My strong guess is it will be a thing, but it will be a thing in ways that we can’t really know about today. But it will be interesting to see how that plays out over time, and do you want me to talk about Facebook as well and their investments in that area or is it really just related to the Metaverse? 

[00:25:32] Jonas Stevie: When we were told on the investment, I think kind of future investment. 

[00:25:37] Rob Vinall: Yeah, so Facebook or Meta is an incredibly profitable company. They have about 50 billion, 50 billion of operating income, and included in that 50 billion is about 10 billion in the investment of losses effectively into the Metaverse and the background of that is full of its strength as a company. 

One of the things Facebook suffers from is that the operating systems are controlled by two other companies, Apple and Google, and for mobile phones. And so I think they don’t want to miss out on whatever the next platform is, and so they’re going to invest in that. I personally think it’s too early to be spending as much money as they are on it. 

I mean 10 billion is a lot of money. I mean, if that was revenue, that would be one of the largest companies in the world and that’s just cost at a time when you don’t really know what the Metaverse is going to look like. I think it’s too much. But on the other hand, Facebook has a value as a company of around $600 billion.

And it’s run by a great entrepreneur who’s very rational. If in three or four years’ time it’s nothing then it will be 40 billion of losses which will then go away. So a meaningful number but not really in the context of Facebook. If it is something big, then fortunately they have invested it in the forefront, so I view it as an option, as an investor.

If the Facebook valuation was super high and it needed the Metaverse to work to make sense of the investment. I would for sure not own the company. But the share prices are unbelievably low, and the valuation is so unbelievably cheap, that it just doesn’t really move the needle in that respect. 

If the Facebook valuation was super high and it needed the Metaverse to work to make sense of the investment. I would for sure not own the company. But the share prices are unbelievably low, the valuation is so unbelievably cheap, it just doesn’t really move the needle in that respect.

It’s incredible. I mean, if you take away the cash on its balance sheet, Meta is close to about a $500 billion market cap and if you add back the losses that they’re making into the Metaverse, it’s close to 50 billion in their income. So you’re paying at 10 times earnings for one of the all-time great companies.

And then people talk about tech companies not being attractive because interest rates are going up. Well, it doesn’t make sense to me. We’ll see how it turns out. 

And then on Wix. I guess it’s not necessarily specific to Wix, but I would just say that for those of you who aren’t familiar, Wix is a company that regularly provides quite detailed guidance to investors and what they expect for the coming quarter and for the coming year.

And there’s a degree of uncertainty at the moment, as they benefited a lot from COVID. People staying at home, building websites, and now kind of people are slowly going back into the real world. Those are that’s led to a slowdown in their business. Obviously, a greater degree of uncertainty as a result of which they’ve decided not to provide guidance anymore. 

I’m personally not a fan of guidance. I think there are a lot of companies who get into a lot of trouble by providing guidance. I recently read a book about GE who Lights Out, which was a great read. I can recommend it to everyone. At the core of GE’s problems was effectively this guidance that Jack Welch gave over decades that they would grow 20% every quarter and it just led to effectively fraudulent behavior.

So I’m not a fan of guidance at all, and if it was up to me, I would advise all of my companies not to provide it. But if you’re going to provide guidance, then you can’t just stop when it suits you. So if they decide on an ongoing basis not to provide guidance, and that’s fine by me, if they decide they want to continue to do it and then they should be consequent and continue doing it. 

So I’m not a fan of guidance at all, and if it was up to me, I would advise all of my companies not to provide it. But if you’re going to provide guidance, then you can’t just stop when it suits you. So if they decide on an ongoing basis not to provide guidance, and that’s fine by me, if they decide they want to continue to do it and then they should be consequent and continue doing it.

So that would be my message to management. I’m actually going to Israel next week to visit with them, so I’ll pass that message on to them. 

Carvana

[00:29:55] David Harmon: Hey, it’s David Harmon based in London. So I just have a question about Carvana. Actually, it’s kind of an industry question, so I’m looking at the UK car dealership industry and they’ve kind of increased margins similar to the US, a lot due to the supply chain issues and it’s kind of set to continue. 

So my first question would be, what do you think, will we reach a point where there are basically no more cars to sell? And the second question would be about the economic sentiment that which is kind of the lowest since the global financial crisis. Do you think that could have an impact on consumer spending and potentially on cars? I probably know your answer to that one already, but I ask it. 

[00:30:47] Rob Vinall: Yeah, I mean, if you’re investing in a business for a long time, you don’t really worry. Consumer sentiment sometimes goes down, it sometimes goes up. But you can base an investment decision around that. If you decide you believe in where business is going for the long term, then you expect there to be good periods and bad periods, so that’s certainly not something I would pay too much attention to. 

Maybe for those of you who aren’t familiar with it. Carvana is an online seller of used cars in the US. A lot of sectors, as we all know, have moved online over the last decades. Starting with Amazon and books and lots of other e-commerce things but used cars are actually the one thing that is still mostly sold offline. I think the penetration of online cars is 1 or 2%, similar to pet insurance.

But it’s a vastly superior experience for customers. You don’t have the hassle of going into a dealership, haggling with a salesperson, or having this fear of getting ripped off. With Carvana, you just can surf the Internet, choose a car, click a button, and in a best-case scenario, the car is delivered to you the very next day.

And I think in the US, there are roughly 40 million used cars sold per year, and Carvana this last year sold around 400,000. So there’s a really, really long runway to go. And I think there’s no reason why the online penetration couldn’t be 10%, 20%, 30%, or even higher in the long run. So that’s the reason we’re invested.

As you pointed out in your question, there’s a lot of disruption to the used car market at the moment that comes from a disruption originally from the new car market. So when COVID hit back in March 2020 and it looked like unemployment was going to go up into the stratosphere and new car sales were, were kind of collapsing.

All of the car companies phoned up TSMC, which is the main company in the world that makes semiconductors, and canceled their orders because they didn’t think they were going to need them. And then what happened was actually the world economy bounced very quickly back from COVID and because of the importance because people were less keen on being in public transport because of Corona and everything. 

Actually, the demand for new cars went up, which is not normally what would happen in a recession. So all of a sudden you had an increase in demand at the same time the supply was falling, so there are fewer new cars being made than usual and the impact of that is people who would typically buy a new car are now buying a used car. 

So it’s creating a squeeze in the market and the prices are going up and all kinds of crazy stuff is happening. But I really don’t think that impacts our investment in Carvana in any kind of meaningful way. There are, like I say, 40 million used cars sold per year in the US, 400K of those were of Carvana. So even if the market were to contract, then there’s still plenty left for them to do.

In terms of if there’s going to be a lot of price volatility with used car prices jumping, and that’s presumably at some point they’re going to come back down again. But Carvana, like most car dealers, actually turns the imagery very quickly. When they buy a car, they typically sell it within about six weeks.

So you might have a very short-term impact where when prices come down they take a loss on or less profit, more likely on some of the cars they have in inventory, but then they start buying new used cars at the lower price, and that kind of washes it’s a way through. Actually, in general, I think it’ll be good for the used car industry when prices come down as that will stimulate demand.

So overall, I think it’s not a problem and it’s not really central to the way I think about the investment. 

EVs and Carvana? 

[00:34:48] David Harmon: Thank you, perhaps like one follow up on EVs because there’s a question like with EVs that it’s a lot about batteries and if the battery only lasts like 10 years there won’t be a used car sale. How do you think that plays into the equation? Because in some sense, I think the transition probably boosts used car sales because there’s not enough maybe infrastructure for those EVs. But then, later on with EVs when they take over, do you think that would still be the right investment? 

[00:35:21] Rob Vinall: Yeah, so there’d be a used car market for EVs, in the same way, there’s a used car market for combustion engine cars, so I don’t think it will change the size of the market. I think one of the questions that I had was about Carvana, one of its key competitive advantages. 

It has a lot of capacity to recondition cars and to the extent, that those electrical cars require far less maintenance than combustion engine ones. So one of the questions I had was to what extent that could negatively impact Carvana’s business. But from what I understand, Carvana doesn’t do mechanical work around the engine or anything like that. 

They are repainting the car, taking out the dings, make sure it’s clean inside. It’s the kind of stuff that you’d have to do for an electric car as well. 

[00:36:13] David Harmon: Thank you.

[00:36:14] Rob Vinall: Good. Thanks. 

Why Carvana and not CarMax?

[00:36:19] Paolo: Rob, this is Paolo from Milan. 

[00:36:22] Rob Vinall: Hello. Hi.

[00:36:22] Paolo: Following up on Carvana, I would like to ask a question about the direct competitor in the US which is CarMax. Probably when you studied Carvana you also looked at CarMax, I assume. And CarMax now also has an online channel, so I was wondering why at the end of the day, you decided on Carvana rather than, for example, CarMax. Also, obviously, you saw some advantages on Carvana versus CarMax, and I would like to understand that. 

[00:36:53] Rob Vinall: Yeah, I think I did. I mean at a high level I admire CarMax enormously and CarMax sells about 1,000,000 used cars a year versus 400K at Carvana, versus 40 million in the whole of the US and so there’s plenty of market for both companies. And I think both can be successful without the other having to fail. 

But that doesn’t answer your question of why Carvana versus CarMax and I think the really big opportunity in used cars is online. Online as next to nothing penetration today and over time would be far bigger and to me and I guess, some CarMax investors might say, well, CarMax is perfectly positioned for that. 

If you want to buy a car in-store, they have stores and if you want to buy a car online, they have an online place. So they can serve both constituencies. But in my view, that’s not the way it works because if that was the way it works, department stores would have, being the big successes in online and not Amazon, that you would have said, well, in the department store if you want to buy the good in-store, you can just go in-store and if they have online shops and if you want to buy online, you can buy it online.

And of course, that’s not the way it works, because online, you require a completely different infrastructure and cost structure than you do offline. For offline you have expensive real estate in well-situated locations. You have lots of qualified salespeople running around. 

You have a logistics infrastructure that can bring inventory into all your little stores dotted around the place, and that’s really just a completely different set-up to what you have online. Online, you have a smaller number of very large performance centers and a hub and spoke network to deliver the packages or the cars, whatever it is to customers.

And the last thing you want is the expense of holding inventory and lots of different locations of paying rent, of having sales, people standing around idly. So in my view, it makes sense if you’re focused on online to have up your online strategy. And if you’re focused on offline have a focus on offline. Trying to combine the two I don’t see any synergies in that. 

So in my view, it makes sense if you’re focused on online to have up your online strategy. And if you’re focused on offline have a focus on offline. Trying to combine the two I don’t see any synergies in that.

Grenke

[00:39:20] Orlando: Hello this is Orlando from Portugal. How are you?

[00:39:25] Rob Vinall: Hi, Orlando. 

[00:39:26] Orlando: Question about holding, I’m going to mispronounce it, but Grenke, is it? I was curious if the events of the past couple of years have changed your views of the company and the management given the audit process and although nothing there was no wrongdoing. There were some weaknesses in internal controls, and the complexity is quite high. Thank you. 

[00:39:57] Rob Vinall: Yeah, so for those of you who aren’t familiar with that. Grenke is one of the longest holdings in the fund. It’s a small ticket IT leasing company which is based in Germany and for small businesses that want to buy a photocopier or some laptops or whatever, it might be that you have the choice of paying in cash. And if they don’t pay in cash, they can get a lease from Grenke, for example.

It’s a wonderful business that has grown very well over many, many years. And then two years ago, two things happened, so the first was COVID hit and that led to a decline in some of their sales volumes. It also led to there being more restrictive in giving out new loans as obviously there was an expectation of higher levels of bankruptcy, which materialized. 

So that hurt the business and then just when it seemed like they were coming to terms with that, in October of 2020, there was a 40-page short report about the company claiming that the company was a fraud, that its customers didn’t exist, that the cash didn’t exist on its balance sheet. All kinds of sensational claims, I would say.

It came hard on the heels of the Wirecard scandal in Germany where effectively regulators have been asleep at the wheel. Well, Wirecard which really was a fraud ended up collapsing. And regulators were keen to show, okay, we’re not going to screw up a second time, and so they’ve really been putting the company through the wringer over the last 18 months or whatever in multiple companies, have been inside the company testing all kinds of things, commissioning reports. Basically, go through the company from A-Z.

And what’s come out of that is that there was almost no substance whatsoever to the claims of the short seller to give you a sense of how absurd they were. One of the claims was that the company’s cash didn’t exist and within a week the company said, well, as it happens, we keep our cash in the Bundesbank. 

So that was just a very obvious point they could disprove. But your question was, has it changed my mind about the company? And on the one hand, as I say, I don’t think there was any substance to the criticisms leveled at the company. 

But on the other hand, I have to acknowledge that the business has suffered a lot from the combination of COVID plus all the disruption created by the special audits and responding to these criticisms and stuff, and so, unfortunately, the business today is a smaller business than it was two years ago, and a smaller business is a less valuable business. 

So it’s from the perspective of two, three years ago, it’s been a poor investment from the perspective of since the beginning of 15 years ago, whenever it was, it’s still being a great investment. But the businesses have suffered. I think in this situation it’s easy to blame the other guy. But every company at some point in time is going to have a short attack on it. 

I think almost every company I’ve ever invested in has had a short attack on it at some point in the other, and you have to have the substance to withstand that. I think there was some bad luck in the way it coincided with this Wirecard scandal a few weeks before. 

But I don’t think investors who blame their bad investments on luck or things like that are going to be successful investments. So I just have to accept that that’s from the perspective of three years ago was not a great investment. 

But I don’t think investors who blame their bad investments on luck or things like that are going to be successful investments. So I just have to accept that that’s from the perspective of three years ago was not a great investment.

Grenke and the short-sellers accusations

[00:44:05] Orlando: But just if I may follow up, but given that it’s still on your factsheet, you still own it. And the stock price has come down a lot. So as a prospective investment, is the price more than adjusted for the destruction value because of the scandal? 

[00:44:25] Rob Vinall: Yeah, I think in hindsight, when this whole attack came on, my instincts were protective towards a company. I found the criticisms made against it disgusting and in that situation I wanted to show loyalty to the company. And that’s actually something I don’t regret, but having seen and at some point, it was visible that the business was really being damaged by this.

The company management spent 18 months doing nothing else but responding to audit requests. You could see the business going down. At some point, probably the right thing to have done would have been to sell, to have sold, but that was an opportunity I missed and saw through today’s perspective. 

I really think the valuation is crazy. Again, the stock is trading around book value. I think earnings get back to their previous level, which I think they will. It’s on a single-digit P for a really good company that could grow. So from today’s perspective, it’s definitely not something I’m planning on selling as of today, but I would probably see that a little bit differently if I could dial the clock back two years. 

[00:45:48] Orlando: Thank you. 

Wix.com

[00:45:49] Akash: Hi Rob. I’m Akash from London. My question is about Wix and stock-based compensation we’ve spoken about this briefly around two years ago where it’s a great tool to attract talent, but it’s also a real expense. 

And around that two years ago, maybe it was 10% of revenues and I think you had mentioned with the scale you should see maybe that percentage going down. Over the last two years, that go up, maybe 17% or so. So just your thoughts on that.

And secondly, I guess with the stock price coming lower, how do you think that plays into attracting and retaining talent? Because I guess it’s an important piece of motivating.

[00:46:26] Rob Vinall: Yeah, so obviously as a long-term investor in a company I don’t like to see dilution. I prefer the opposite, actually, where companies are repurchasing their shares. So my stake in the company gets bigger over time. 

But the reality of tech companies and especially younger tech companies is the major motivating factor for young talented people to go and work there is the prospect of stock-based compensation and the additional upside that can come from participating in the company. If it becomes really successful. So I don’t think you have a choice on that. 

But the way, I kind of think about it is, that when a company does mature, stock-based compensation will also normalize, and I think you’ve seen that in a lot of the first or second generation of tech companies. So I remember when I first invested in Google, there was a lot of concern about stock-based compensation and dilution and stuff. 

And of course, as the company has matured that’s normalized and you see that in other companies. So the bet would be that over time that does normalize, but that’s an important point, because obviously if your stake in the company is buying diluted by, say, 5% every year, then the earnings power needs to grow by 5% just to kind of just to break even. 

And then, in terms of kind of the decline in the share price and what that means in terms of employee motivation. Fortunately, this hasn’t happened in a vacuum pretty much the entire tech sector has really declined very rapidly in price. You don’t necessarily see it, and when you look at the Nasdaq, the Nasdaq is very heavy and large-cap companies like Google and Apple and Microsoft and stuff like that. 

So the Nasdaq looks comparably stable, but if you look under the surface, I saw a statistic recently that over 40% of the companies in Nasdaq have lost over 50% of their market value this year or not this year from the highs, I think. 

So it’s pretty dramatic and it’s happening under the surface, but it’s fortunately it’s happening to Wix’s competitors as well. So well, that’s the case I think that should help them. 

Assessing management teams

[00:48:47] Speaker 7: Hi, thank you for taking my question. My main question is about assessing management teams. How much does their stock ownership factor into that? I think as investors we often take comfort in seeing founder owners in the management team, but I’ve sometimes wondered if it’s a lazy proxy. And related to that is there are plenty of management teams that own a lot of stock, but also sell a lot of stock.

And while they’re trumpeting the company and talking about how cheap the stock is, and I think sometimes Carvana, others can come to mind in that category, but there are plenty of examples. Given management integrity is one of the main kinds of tenants that we all have, you have, does that kind of call put an asterisk on it? 

[00:49:38] Rob Vinall: Yeah, I called the Fund Business Owner. And one of the reasons that the fund is called that is because I really tried to align myself with business owners. So one of the biggest criteria before I make an investment in a company is making sure that there’s some kind of founder or major shareholder there whose presumably well aligned with me because he or she is also a big owner in the company. 

So in an ideal situation, I like to see the CEO as the founder of the major shareholder. It’s not always the case though, but where it’s not the case. I always look for there to be some major shareholder whose also kind of involved in the company. So that they’re engaged, and that’s part of the kind of the research process to make sure that that’s the case.

No, but it’s really something I think it’s super important that I also look for. In terms of sales, in pretty much every company I can think of the CEOs’ sales stop periodically. And it’s not something I have a problem with, and I’ve never found it to be an indicator of there being problems around the corner or anything like that. 

Normally what they sell is a small part of their overall stake and the reality is people have priorities. Boats, in the case of Darryl. Maybe the house or whatever it might be and I think it’s understandable that having built something of value that at some point they want to sell part of their stake and use the money to buy something else. 

Carvana’s latest acquisition

[00:51:27] Speaker 7: Thanks, Rob. Regarding Carvana, what’s your take on their latest acquisition as it may, having as they increase the debt and therefore maybe the risk profile in a time when it’s like a working capital-intensive business and they are not generating cash flow. 

[00:51:46] Rob Vinall: Yeah, so Carvana announced an acquisition a few weeks ago of Adesa. And Adesa is a company that runs physical auctions for used cars in the US. So the way the market typically works is to purchase cars, wholesale, auctions to put on their lot and then they get sold from the lot, obviously to the retail customer.

And Carvana bought this business. It’s a nice business. A mature, probably modestly declining business. But with a decent amount of cash flow, the main motivation to buy it was, as you can imagine, it’s an old business, so they have these auction sites dotted all over the US. I imagine in very good locations, probably out-of-town locations 50 years ago, but probably given the way cities have grown, probably much more central locations today.

And these locations have a lot of excess land on them, and Carvana’s plan is to build IRCs or Inspection and Reconditioning Centres on these plots and use that as a way to build out its network. 

It strikes me as a really, really smart thing to do which will accelerate its footprint. As anyone ever built anything knows it’s really difficult to get approvals to get something built. So there’s lots of opposition and stuff. These are plots of land which are already approved for used cars and stuff, so I think it will help them to get to where they want to go more quickly. 

Now, as you mentioned as a business, it’s not profitable at the moment. It’s investing a lot because it obviously wants to grow very rapidly and the way it financed this acquisition was with debt.

I’m not a big fan of debt at all. Most of the companies I own have net cash to the extent there is a lending business, then they would typically have debt as there’s no choice, but they would have less debt than most of their competitors, so it’s not something that I’m a fan of, but the way I think about it is, in two ways:

Firstly, the debt is held against like physical assets, so real estate, in the case of the Adesa acquisition, and used cars which are very liquid assets effectively. So it’s very low-risk debt from the perspective of the lender. 

And the second thing is if you look at the shareholder base of Carvana. It’s a very wealthy shareholder base. The Garcia family is very wealthy. And a lot of its investors were the company to need capital would be no problem to put capital in. So from my perspective, I don’t view the indebtedness as being overly risky, but if I had a choice. I prefer it wasn’t the case. 

There’s actually one situation where I’ve seen in the past, which is actually the revert, the exact opposite of this. So in Germany, there’s this company called Beiersdorf. Which is the owner of the Nivea brand. So the skincare which I’m sure everybody is familiar with and Beiersdorf is long, about 40% of the shares belonged to one family.

And what they do is the family has borrowed, I don’t know what the numbers are now. This was a few years ago, but they had called it 5 billion of debt privately and they held 5 billion of cash in Beiersdorf against that, so if ever they have had a problem servicing that debt, they could just simply take the capital out of Beiersdorf to service it. 

And from the perspective of Beiersdorf shareholders, it kind of sucks because they’re getting all the juicy returns from the investments they’re making, and then you’re stuck with this cash which is, at the time it was yielding zero over recent years. That’s probably had a negative return.

So I wasn’t super keen on that either, and in a way, I’m not a guy who particularly likes leverage like I say. But in a way, it’s actually quite an interesting situation with Carvana that you get to kind of piggyback on this leverage in a non-recourse way. If it works, the returns will be way better than they would have been. 

But if it doesn’t, you can always just kick in a bit more equity, so it’s I have mixed feelings about it, but I could see some upside to it as well. 

Salesforce and the Slack acquisition

[00:56:32] Steph: Hi Robert. Steph from Zurich. My question relates to Salesforce and Slack. Given you were a Slack owner before Salesforce acquired it. And the question would be how do you see the Slack acquisition by Salesforce and how do you continually track its progress? And maybe related to that, the second question what do you see as the main risks in the Salesforce investment?

[00:57:02] Rob Vinall: Yeah, thank you. So we invested in Slack a couple of years ago. For those of you who aren’t familiar with it. This is kind of like WhatsApp but for business-to-business. So it’s a messaging tool for businesses. It was an incredibly successful company that was growing primarily, virally. 

So obviously any messaging service. The more people who are on it, the more value it has to use, so it would grow virally just by people passing it on to each other. But I think they hit a wall at some point where they needed it. 

If you want to penetrate the larger companies, then you have to have an enterprise sales force team who can go and speak to the management and convince them of how good your product is. And so I think they hit a bit of a wall and that was around the time that Salesforce.com bought Slack. This was probably about 18 months ago now.

I thought it was an incredibly smart decision because it gave Slack what it was missing, which was an enterprise sales team. And from Salesforce is perspective, Salesforce as I’m sure many of you are aware, is an enterprise software company with lots of different software modules. Primarily, for the process of selling stuff in a company and what Salesforce was lacking though was something to kind of tie all those individual modules together, and I think that’s what Slack brings to them. 

So I think it was an incredibly smart decision and at the time the market was very, very pessimistic about it, so I think the day Salesforce announced it was going to purchase Slack, the share price was down, 15%, 20%, or something like that, and so Salesforce is a company I followed for many years. 

But that was the moment where I started focusing on it as a potential investment. And I think Salesforce is a great company. I think the Slack acquisition makes a lot of sense and as I had the cash coming in from the sale of Slack to Salesforce. I basically use those funds to invest in Salesforce.com. 

And in terms of tracking how Slack does, I think Slack has this enormous opportunity to become effectively like WhatsApp for business and if it achieves that, it could be Slack alone I think could be worth as much as Salesforce.com is today. I think it has a great chance of achieving that through the combination of its own viral growth plus the very powerful Salesforce that Salesforce.com has.

I think Slack has this enormous opportunity to become effectively like WhatsApp for business and if it achieves that, it could be Slack alone I think could be worth as much as Salesforce.com is today.

So it will be super interesting to see how that goes and probably the key metric to follow is how the users are growing and how the revenue is growing at Slack.

How do you free up capital for the new opportunities?

[01:00:05]  Stephan Uhrenbacher: Stephan Uhrenbacher from Hamburg. You talked earlier about your decisions to sell, and the good ones are when you lose your thesis doesn’t work out anymore, so I’m just wondering, from a practical point of view, once in a while, you’re also getting excited about a new opportunity, and you have a concentrated portfolio. How in practice do you free up capital for the new opportunities? How do you time that with your sales? 

[01:00:36] Rob Vinall: Yeah, that there does seem to be a natural ebb and flow to that. Over time, there’s normally one or two companies that I’m less enthusiastic about in the portfolio, and they might either be sold down quickly or slowly over time, and normally around that time there’s something else I’m getting interested in, so it tends to happen quite organically. 

I’ve also benefited from I think over the years there’s always been a steady flow of cash into the fund. So one of the easiest ways to buy new opportunities has generally been to just deploy that cash into a new opportunity. So I’d say that’s how it’s generally happened there. That there tends to be a natural flow to these things. 

Salesforce’s disruption risk

[01:01:32] Allan: My name is Allan and I’ve come from London. I had a question about Salesforce. So one can argue that generally there’s been an increase in the number of firms providing similar or the exact same software in both the developed world and the emerging world. Do you feel or do you believe that this can commoditize the sector Salesforce operates and essentially creates negative pressure on the future earnings potential of the company in the long run?

[01:02:07] Rob Vinall: The important thing to understand, I think is that Salesforce is really like an operating business for companies. There are companies that build their entire business around Salesforce.com. It’s so tightly integrated into all their processors or their data and stuff, it’s almost impossible to imagine a scenario where it gets ripped out. 

So in short, there’s not something that I worry about. The one thing you do see is what I just said refers obviously to large established businesses, but there are obviously a lot of newly established businesses and for them, that argument doesn’t count. So you have a lot of lighter CRM solutions, easier to use, and cheaper as well.

And for a smaller company, probably it’s more natural for them to then gravitate towards one of those types of solutions. So I think there is competition in that part of the market, but even there, I’ve spoken in the past of venture capitalists and what you hear is that at some point when the business gets to scale, they’re going to want to switch to Salesforce at any point.

So the ambitious companies which are being built for scale oftentimes start out with Salesforce out there that have to switch later on. So it’s almost like an industry standard, I would say. It’s really difficult to imagine anyone disrupting it, but there is competition, certainly at the low end, for small and medium-sized businesses. 

Chinese ADRs & Prosus

[01:03:52] Steve: Hey Rob, ever in the peanut gallery? I’m going to give you a few questions off the Internet, and I’ll read who they came from, this first one comes from Luke Skywalker, for real. The questions on Chinese ADRs and Prosus in particular just how has your point of view changed with the developments over the last couple of months? 

[01:04:12] Rob Vinall: Yeah, I don’t think there have been any developments over the last couple of months. So Prosus is our investment. It’s a South African company. Chief moved to the Netherlands, but it’s originally a South African company and 20 years ago made a large investment in Tencent. 

At a time Tencent was a tiny company Fast forward 20 odd years today and Tencent is one of the largest companies in the world and probably the single most important company in China. And Prosus has virtually never sold any of its shares, still owns 29% of Tencent, and that stake alone is worth about €115 billion and Prosus’s market cap is 70 billion. And in addition, it has a whole bunch of other stuff as well. 

So I think it’s an evaluation which is totally crazy, but the question is, of course, always and well, there must be some reason for that, and that the share price has done very poorly the last few weeks and I think one of the reasons given is that there’s an increased nervosity about the robustness of ownership rights in China, especially given everything that’s happening in Russia. 

Well, we can go down that rabbit hole if we want to, but I really view Russia and China as very, very different things. I know from the perspective of someone based in the US or Europe who’s never been to either Russia or China and both seem to be vaguely previously communist and with autocratic leaders, it can feel like it’s more or less the same type of thing.

But if you’ve spent any time in China in particular. I mean the two countries couldn’t be more different in my view. Russia is effectively a mafia state in my view. I think that’s been clear to people for many years, and it’s obviously very sad, being shown to be the case. Over the events of the last few weeks, Putin has done nothing for his people.

The company hasn’t developed in any way. The life expectancy of males has declined. You have a small minority of hugely wealthy people, but that wealth has come from effectively stealing state assets as opposed to creating businesses. 

I saw one idiotic comment comparing Russian oligarchs to Jeff Bezos. Jeff Bezos created one of the greatest businesses the world has ever seen. That creates value for everyone on this planet. The difference between a Russian oligarch just couldn’t be more different. 

So you compare that to China, and I think China is the opposite of that in almost every respect. It was a struggling third-world country 40 years ago, and it’s risen now to being—it’s on track to become the largest economy in the world, and it’s been an incredible development of human potential. 

Hundreds of millions of people move from poverty in the countryside into cities. Incredible companies created incredible increases in wealth. It really couldn’t be more different in my view, and so if the question is implying look what’s happened to Russia. China is next, then that’s just a hypothesis that I just don’t agree with. 

It kind of reminds me, in my very first job, which I don’t like to talk about too much, I had a stint in London at Goldman Sachs Asset Management, which I hated and was not particularly proud of. But I was there for about a year.

One of the reasons it was such an unpleasant job was the guy who was the effectively the boss of the business at the time he wasn’t a particularly competent guy and it kind of captured it and we were laughing at him when he wasn’t there and it kind of captured it once. 

We had this Japanese businessman visiting the office and it was a problem because this Japanese guy didn’t speak any English, and none of us spoke Japanese. And my boss back then said that’s not a problem. Why don’t you take Christophe? Now, Christoph was a guy in the office who was from France but spoke excellent English as well. So he, by English standards was close to a genius in terms of languages. 

But we’re like, yeah, why would we take Christoph, and he goes, he speaks foreign. And I kind of feel like when people effectively throw China and Russia in the same bucket, I kind of feel like it’s like they’re making a similar mistake, but I realize not everyone will agree with that, but that’s the way I see it.

Moats

[01:09:48] Steve: Alright, the next one from the Internet, Marcel Schober. This question is on moats. Can you talk about how the different sources of moats and how that point of view has changed over time? 

[01:09:58] Rob Vinall: Yeah, it’s changed a lot over time, so there’s this. You know, one of the if I think about my journey as an investor. When I started out, I was very much focused on balance sheets and numbers and that kind of stuff. And, I started investing properly around the time of the .com crash. 

And at the time of the .com crash, a lot of the companies last 95%, 98% of their value, and in some cases, they had more cash on the balance sheet than the actual value of the company. So as a rookie investor, a know-nothing investor. 

But if the company had 100 million in cash, you could be buying it or a stake in it for 10 million. That kind of looked to me like a very good deal, so that’s kind of how I started investing, and then after a while, I noticed sometimes it was working really well, but other times it wasn’t working at all well.

And one of the reasons it wasn’t working well was when the company had no competitive advantage and even though it had a lot of cash, it was losing so much money. In the end, it kind of went to zero. And so quite early on in my investing career, I kind of started focusing really a lot on competitive advantage. 

When you start thinking about competitive advantage, then you come across Warren Buffett, and he’s obviously talked a lot about how important it is that companies have moats and this type of thing. So I would say it’s something that I was focused a lot on. 

But two things have really changed my mind about it. The first is I don’t think all moats are created equal, so I think some are very positive for a business. For example, if you have a low-cost position, I think that’s fantastic Daryll described Trupanion earlier the lower the costs are, the better the value you can offer to the customer, which allows you to lower costs even further. So it’s a very positive type of competitive advantage.

But there are other modes. For example, switching costs, where the idea is the customers are so locked into the company that you can basically give them a crappy service, raise prices, and whatever happens, they basically don’t have any choice, they have to stick with you.

I think that’s kind of like a very negative moat because it incentivizes you to do a bad job. And if you’re doing a bad job, then at some point in time the business is going to going to deteriorate. So I think that was really one of the first insights I had about it.

The second one I had was that I kind of realized that the world is changing so fast that by far the most important thing to look for in a company is that it has an ability to adapt. That is permanently improving itself and figuring out what the new challenges are, what the competition is doing, what the new services customers want, and responding to that and developing the business. 

And then the big scheme of things is a moat, if a company with a wide moat, is it more or less likely to have that sensitivity to customer requirements. I think on average, if the moat is really wide, then the companies generally become complacent and fat, and less focused on what the customer wants. 

So I don’t think a moat is always an unmitigated good. So I wrote about this in my most recent letter. What I much prefer to see is a company that is improving so rapidly that moats are kind of emerging from that, but where the moat is really kind of the output. And so it’s kind of nice to have, but what you’re really looking for is the input that constant improvement, because that’s what’s going to drive the really long-term success. 

What I much prefer to see is a company that is improving so rapidly that moats are kind of emerging from that, but where the moat is kind of the output. And so it’s kind of nice to have, but what you’re looking for is the input that constant improvement, because that’s what’s going to drive the long-term success.

Appropriate diversification

[01:13:49] Steve: Thanks. Last question from the Ether. This is from Yanni, it’s on diversification. So Charlie Munger says that three stocks are adequate diversification. What’s your latest thinking on appropriate diversification, and how has that changed every time? 

[01:14:04] Rob Vinall: Yeah, I mean I have like a very non-scientific approach to diversification, which is that I have. I’ve always had around 10 stocks in the portfolio and there’s nothing scientific about that. I know if I have too many stocks then I’m just going to replicate the index, and if I have too few if they run into problems and I’m potentially going to lose all the money, so I want to be somewhere in between those two extremes.

And I’ve always felt 10 is very much on the safe side. Because you got 10 stocks and one were to go to zero, which I hope wouldn’t happen, but theoretically could. Then you’d still have 90% of the money left, which seems like a level you could easily recover from. So I think it could be easily less than 10, but I just view that as my margin of safety. I’d rather be on the safe side than have too few, but three probably works out fine.

Especially, if the companies are quite diversified and have different businesses. So if you think of like Berkshire Hathaway or Amazon in any respect, they’re one business, but they’re one business that contains lots of different businesses within them, so three would probably work, but why take the risk? Thanks for the questions from the Ether. 

Tilman told me earlier on that the live stream didn’t work for the first session, which my initial reaction was obviously, disappointment because I know a lot of people wanted to see that, but I think it’s time that the people in the real world got some revenge on the virtual world. But I’m glad to see the live streams were working now, and I hope there are a few people in. 

Yeah, and Tilman said the first session was recorded so it will be uploaded and so that will be available at some point. 

The right management for the right company?

[01:16:07] Monic: Hi. This is Monic from Boston. So one of the things that I spend time thinking about is when you invest in 8, 10 companies. Sometimes you’re living with contradictions in your portfolio, especially with the management teams, and I see in your portfolio, that you’re in Salesforce which had that unique management culture or is alone credit acceptance court that has a very different culture and so how do you reconcile and think about is this the right management for the right company? 

[01:16:36] Rob Vinall: Sorry, were you saying you see contradictions in the portfolio or just different types of management? 

[01:16:40] Monic: Just different styles, different companies and how do you make sense of all that? 

[01:16:41] Rob Vinall: Yeah, there are lots of different types of great management. I mean what you’re looking for primarily as sort of authenticity and oftentimes I think the best managers are like their skill set is uniquely suited to the company and the company uniquely leads their skill set, and that’s often because that manager is the founder or so the company to a certain extent is there a reflection of their personality.

And I used to think there was a time a few years ago where Yahoo was doing far worse than Google, and still is, obviously. But it wouldn’t have helped if Larry Page has suddenly gone to Yahoo. I mean there would have been a complete disaster. And of course, Marissa Mayer didn’t have much luck there. 

I mean, Larry Page was uniquely successful in that particular environment, and that’s not a coincidence because he created that environment. So it depends on the situation. And if I look at the management teams like you point out, some of them just couldn’t be more different by thinking of the credit acceptance guys who I just couldn’t think more highly of. 

They’re very introverted. Straight shooters. Tell it like it is. If they respond to a question. It really goes beyond one sentence, and that one sentence rarely goes beyond 10 words. And so, like very understated but very precise and then you have kind of Marc Benioff. 

At the other end of the extreme, who’s like this larger-than-life personality on the conference call is the first 10 minutes taken up with how wonderful his team is and how wonderful the world is and how totally great everything is, and how everyone is a genius. 

It couldn’t be more different, and I mean, personally, I prefer the understated guys to that, but you can kind of see how in the case of Salesforce, that it works because as the name suggests Salesforce is a company that is about selling things and he’s obviously a great salesperson to not just his customers but to his employees. The ratings that employees give to the company is just completely off the charts. 

So it really is dependent and that’s why I don’t think you can have like a set idea of what constitutes great management. It’s very situation-specific. One of the criticisms I sometimes see from value investors is they don’t like it if a CEO is too much of a showman or to say was he. 

But I think as we touched upon earlier if the job of a CEO is to lead to make people enthusiastic, to make them want to follow. So I think that’s not necessarily a bad trait to have that ability to get people to follow you to be able to sell to people. Especially if it’s a setting company. 

And the other end of his stream is often times when a charismatic leader steps down. It’s the CFO who takes over. CFOs are kind of numbers guys. They tend to be kind of very understated, very into the details into the nuts and bolts of the business, but then investors respond to that because they speak their language, but it’s not always great for the company, actually.

You’re never going to get any that’s necessarily the type of person that can motivate employees. You can make bold decisions to go into new areas to close businesses down and that kind of stuff. So it’s very situation-specific. 

Investing money from other people

[01:20:43] Arnold: Hi Rob. Arnaldo here from Italy, I’m just curious how long have you been investing for yourself? But before the fund, were you investing before your working experience, and how did your approach change from investing for yourself to investing money from other people?

[01:21:06] Rob Vinall: Yeah, thank you for that question, so that’s really how I learned to invest with just simply investing my own money. I caught the investing bug in the .com crash just when there was just an incredible period to be investing because things were so cheap and it was a lot of fun intellectually.

It’s also a lot of fun when you’re making investment decisions and you’re making money, and so it’s like I really loved it and ever since then, I’ve been investing my own money. Constantly trying to learn about investing and get better and that kind of stuff.

In 2004, I moved to Switzerland and started working for this family office based in Tessin. The family office was run by this very patriarchal Octogenarian Italian guy, and he called the shots, he said what you have to do and I didn’t really like it.

I was enjoying investing my own money and hated someone else being the decision-maker and so this is getting a little bit onto the topic of tomorrow. But I really wanted to be the one making investment decisions, and so that’s why I set off and did my own company.

I was incredibly fortunate that the way RV Capital got started was my first client was a guy called Norman Rentrop, who’s a publisher based in Bonn, and he was the one who provided the seed financing for the Business Owner Fund when it started in 2008. The one thing he said to me when the funds started is like do whatever you want but just don’t change. Just keep doing things exactly the same way.

That was great for me to hear because I didn’t know any other way to do things and the way I’d manage my own money. And he not only tolerated that, but he encouraged it and so since then I’ve really never looked back. I think I’ve managed to dodge a lot of the mistakes that the investment industry makes.

And it wasn’t because I was smart enough to see they were stakes and make an active decision not to do them. It was simply because I just didn’t know how the industry worked. 

I mean, I’ve never really been in it. I’d only been managing my own money and so it was a great way to start. Thanks for the question. 

I really wanted to be the one making investment decisions, and so that’s why I set off and did my own company.

The ideal Business Owner Fund investor

[01:23:37] Dennis Hong: Thanks, Rob. I really enjoyed this meeting. Thank you for getting us all together. It’s really special. Thank you. 

[01:23:42] Rob Vinall: You thank you for getting so many people together last night. Dennis said he planned to hold a little dinner for about 10 people at mushroom to 60 or something. So thank you for that. 

01:23:53 Dennis Hong: Thank you for all for joining and for the patience and something I kind of threw together, literally threw a wedding reception in two days. Anyways, Rob, thank you again for this incredible gathering. I have a question just as a fellow fund manager, how do you think about qualifying investors into your own fund? Are there certain characteristics that make an ideal Business Owner Fund investor? 

[01:24:19] Rob Vinall: Yeah, I kind of fell into this by accident rather than by plan, but when the funds started, I kind of thought, I’m a fund manager, I’d better go out and try and find some clients. And, of course, when you’re like a very small fund with, at the time, I had less than 10 million assets under management. Zero track record. Zero reputation because I’d only been managing my own money at that point. 

Of course, no one wants to invest with you, so I would like sometimes travel like spend a whole day traveling somewhere to pitch to someone to invest in me, and then after having wasted the whole day on this, they would say oh sorry we can’t invest because you have to have a 10-year track record.

I’m like, did I have to lose a whole day first to figure that out. So I kind of like threw my toys out of the pram and I hate this, this makes no sense, I’m not doing it and just focus really on the investing side of things. And then it’s like an interesting thing started happening that every now and again someone would reach out to me and to see whether they could invest with me. 

Despite the fact that I was small and unknown and with only 10 million assets and management, it was because of that. Yeah, otherwise they wouldn’t have reached out. So I kind of stumbled on it really by accident that there’s this incredibly powerful tool which is just to allow the right people to find you. 

Now it’s a lot slower doing things that way. If you look at the assets under management of the Business Owner Fund. A lot of funds they can’t do this and then they kind of hit like the jackpot and then the assets do that. 

If you look at Business Owner Fund, it was really very, very straight and still is actually to this day. So it’s slower and this gets a little bit into the topic of tomorrow, but I think it creates a much better investor base and you just have to make sure your cost base is adapted to that situation. 

So if you hire 5 analysts and fancy offices and all that kind of stuff you’re going to be in trouble if you don’t. If the assets don’t start coming in, so then you’re kind of forced to go out and find people, but if you have the patience to let the right people find you and a cost structure that fits that, then it’s worked really well for me. 

The right investors

[01:26:33] Dennis Hong: Are there any characteristics of investors you accepted into the fund that you later regretted accepting in and are there characteristics or qualities of that type of investor that you take away as a heuristic? 

[01:26:48] Rob Vinall: Well, it’s quite tough to invest in the fund as everyone who’s invested in those. So, fortunately, I can honestly say we’ve never had an investor in the fund who I’ve regretted coming in. It’s a wonderful relationship with all of the investors. There’s never been an angry word spoken between us and it’s really been a very fulfilling aspect of managing the fund.

What I have done though is take meetings that I’ve regretted. So for example, I have a policy that I never speak with intermediaries. I only ever want people who are managing either their own money or if it’s an endowment or whatever. But I want people to make their own decision and I want to have that direct relationship with them. 

I don’t want some kind of salesperson or private banker or that kind of person as an intermediary. But one time I took this meeting with this intermediary against my better judgment, and it was a great meeting. They really understood everything I was saying, and I thought, well, this is turning out way better than I expected. 

And then right at the end of the meeting, they said we can’t invest in your fund, but we have this pool of capital which we could put into a new vehicle. And but we would like to take a cut out of it. So they basically were proposing some kind of a structure where they were going to take some of their customer funds for themselves or like, “Rob, what have you done?” So meeting finished and lesson learned. 

[1:28:26] Dennis: Thank you. 

Ryman Healthcare

[1:28:34] Tim: I’m Tim from Hamburg. One of your ambassadors who ran through this process made it. 

[01:28:41] Rob Vinall: It’s not easy, right? 

[01:28:42] Tim: It’s not easy, no, but it’s worth it. And now I have a question about one of your long-term holdings, Ryman Healthcare in New Zealand, which has a great, I think, tailwind from the demographics. I was wondering how we think about because two businesses that you got, the care business and then you got the real estate development business which is pretty much depends also on the interest rate environment, which is probably increasing a bit, and also the real estate market, which is also dependent obviously on how interest rates are going to move. So I was wondering what’s the view on the perspective on that, and will Ryman still be able to, even if the interest rate would increase tremendously, be able to still set the prices? 

[01:29:30] Rob Vinall: Well, it’s great to have a question on Rymans. It’s probably by one of my favorite companies in the world if not the favorite and it’s because they have the most incredible mission that I’ve ever come across. We were talking about Trupanion earlier and I think care of pets is a pretty important mission, but Ryman’s mission is taking care of mom and dad when they can no longer take care of themselves. 

They build and operate retirement villages. It’s a business that across the world is completely dysfunctional. The story of the retirement industry is that after the Second World War, there was new prosperity in the West, and previously when old people got old, probably they weren’t taken particularly good care of. 

But in this new prosperity, hospitals were being built, and of course, all people were then being taken into hospitals when they couldn’t take care of themselves. That didn’t work because they weren’t getting better. They weren’t going to get better. They were, approaching the end of life.

So they could stay in the hospital. It was too expensive. They had to go somewhere else. So what effectively has happened all over the world is these you have these institutions that get built which are kind of like a hospital in that they take care of the physical well-being of the person. So assuming it’s well run, it’s clean. There’s a nurse on hand if you have a problem. The room is taken care of. You get changed.

All of the kind of these physical needs are well taken care of, but nothing is done to make life enjoyable and worth living. There’s nothing done for the spiritual side of life and that’s why anyone with an older relationship, probably everyone here, knows that the very last thing an old person wants to do is to go into a retirement home because they know that’s basically game over. 

So they kind of push it to the very last possible minute when they’ve had like the 10th fall and when it’s basically the end and then they go in and they’ve more or less given up already and typically would die quite soon afterward.

And Ryman has taken this paradigm and created a like a Disney-type experience in their villages, where the villages a fun place is, where there’s a lot of love, where there’s a lot of friendship, where there’s a lot of things happening and if you visit one of these villages, it’s one of the most moving experiences you can imagine.

So I think it’s one of the most incredible businesses I’ve ever come across. And your question was about interest rates. Obviously, there’s a need for old people to be taken care of. I mean, it’s probably one of the single biggest unmet needs in our society today. So irrespective of what inflation does and interest rates do or whatever. This is a business that I think will be doing very well.

But as it happens, I think is also exceptionally well suited to inflation and higher interest rates because I mentioned earlier that the best type of business to own is a capital-light business in an inflationary scenario. Now you might think Ryman doesn’t sound very capital-light. It builds these huge villages. They cost billions of New Zealand dollars to build. 

But the super interesting thing is, once they’re built, Ryman retains ownership of the village. But sells an occupation right to the residents. The resident pays money to Ryman and in return gets the right to stay in the village for however long they need to. So basically, Ryman participates from any appreciation in the value of that asset. 

In fact, that’s one of its main sources of earnings but doesn’t carry the capital. The resident carries their capital. So I think it’s an ideal business for an inflationary scenario. 

Great, I can’t believe how quickly time has gone by. It’s already a little, well after 12:00. So I’m sure Nate is chomping at the bit to get out onto the slope. So I don’t want to keep you any longer. Thank you everyone for coming. Thank you for your questions. Go enjoy the mountain and we’ll see you back here at 6:00 PM. 

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