How has RV developed? Andreas Lechner & Rob Vinall answer

During our yearly investor Q&A investors and potential investors of RV Capital have the chance to ask us their questions. We, Rob Vinall and Andreas Lechner will give our detailed answers to these questions.

As a service for our readers, we are sharing the transcripts of the RV Capital meeting 2023 in Engelberg with you.

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We have discussed the following topics:

Introduction

[00:00:01] Rob Vinall: There was a change in the law in Switzerland, as a result of which if you’re an asset manager, you have to apply for a licence. As part of our licence application, you have to be two people. It’s easy to complain about regulation and a lot of it is very frustrating, but I think on this point, having two people, especially after what happened in the summer is for sure a good thing. When I introduced it like that, it sounds like it was done out of necessity rather than out of desire. And I can say it was certainly something we should have done a very long time ago anyway, or in fact, in many respects already were doing. We’re very old friends. I think we met in Omaha for the first time.

[00:00:44] Andreas Lechner: We met in Bari in Italy. That was in 2000 in– no, no, sorry. Not in Bari. It was in Sears at a common conference that a friend of ours, Norman Rentrop organised. It was a get-together of 20 family offices, and I was quite excited to be part of this group. This is where I met Rob and we stayed in contact ever since.

[00:01:09] Rob Vinall: Yeah, and we’ve visited companies together many times over the years and exchanged views. Andreas is probably the person I’ve most often talked about stocks with. And so Andreas joining was just a sort of a natural extension of what was happening anyway, in terms of how we work Andreas is himself a very successful and passionate capital allocator. He continues to manage his money. I continue to be the advisor to the business owner fund, and we make our investment decisions separately. Sometimes we see things the same way. Sometimes we see them differently. But what we always do is enjoy visiting companies together, talking about them, exchanging ideas, and that’s the way we’ve worked in the past and how we continue to work in the future.

[00:02:04] Andreas Lechner: Exactly. It’s very exciting and very pleasing to work with Rob. He’s a great person to talk about businesses, to talk about investments, and visit companies. He’s great at judging management and it’s a great pleasure to work here. And also, to share in the administrative work a bit, which has certainly increased since the regulation came about.

[00:02:35] Rob Vinall: So for those of the participants that weren’t here three years ago when we did the Fireside Chat, maybe two or three sentences on who you are.

[00:02:46] Andreas Lechner: OK, I was a passionate investor out of high school and a bit of my family were through investing, and it was always more or less a private investor, moved to Switzerland 10 years ago and so I lived very close to Rob. A couple of years ago I set out to start my own business, but the regulation being as it is, it turned out to make much more sense to team our forces since we work closely together at analysing companies and so why not go for one licence together instead of each one of us hiring people.

[00:03:28] Rob Vinall: Yeah, and you joined actually on the 1st of July. It was only a couple of weeks later that I had a medical emergency which you all know about, and Andreas was in the hospital with me. I think from the first day I was taken in and an incredible support to me emotionally, not just as a friend, but also knowing there was someone there to keep the bills being paid and make sure the business kept on running so an enormous thank you to you for that.

[00:03:56] Andreas Lechner: Yeah, you’re welcome. My pleasure. I’m very glad about how it all turned out.

[00:04:01] Rob Vinall: OK, well last year was a very tough year and I don’t want the impression to arise that we’re trying to run the clock down. Was it 12:00 already? No, it’s a tough year. We can’t change what happened last year, but we can answer your question. So Olivia and Tommy are here with the mics and are looking forward to handing them out to you. Who wants to go first?

AddLife

[00:04:37] Paolo: Hi Rob. Hi Andreas. Quick question regarding AddLife. I’ve seen that the CEO has recently changed, and I just want to ask you what is your take on this change. The other thing is the price, the stock price has gone down quite a lot from the high and so what is your feeling now in terms of the valuation of AddLife?

[00:05:00] Rob Vinall: I think when I invest in a company, what I’m looking for is people who want to make that company their life’s work.

I think when I invest in a company, what I’m looking for is people who want to make that company their life’s work.

And so what shouldn’t happen is that the CEO steps down after a few years. In the case of Christina, it was after I think five or six years. So I’m disappointed by that. And this happened actually in one or two of the other companies I’m invested in as well. I don’t think it’s because there are any problems at the company. I think it is connected to COVID.

It was a traumatic experience for many, many people. When I spoke to Christina afterwards, she said, she’s at a stage in life where she lost her mother and so it caused her to rethink, okay, with the time I have left, potentially, what I want to do in my life? And I think a lot of people in COVID decided there were things they wanted to do differently, and so I was very sorry to hear it. But I understand her reasons completely and I think she did a fantastic job. We remain in contact, and if she’s watching this, I wish her well.

In terms of the share price development, I think there are a couple of things the company had just an incredible run during COVID. They sell COVID tests. You can imagine they had a big boom, so the earnings shot up a lot and at the same time, the share price did as well. I think there’s been a coming down to Earth over the last sort of year or so where the earnings growth has come down. Probably people’s expectations of growth have come down. Some of the sort of frothiness in the share prices also come down as well. With the benefit of hindsight, it would have been a company which I should have sold when the share price was close to its highs. In fact, I did sell. I think approximately half of our position, but in terms of the business and the people running it, it’s a great business and I remain convinced by it. Andreas, do you want to add that?

[00:07:29] Andreas Lechner: I have no comments on AddLife. Nothing.

[00:07:34] Rob Vinall: It reminds me of somebody. Okay, there’s Cassandra. Hi.

How do you build a relationship with the management?

[00:07:43] Cassandra: Hi, I was wondering of course with some companies you have closer contact with management and management is, of course, an important consideration when you make an investment or at least if they’re good-quality people that are running the businesses. I was wondering if you both perhaps could shine some light on how you interact with management. Of course, when they change, but also some portfolio companies are large. Maybe you don’t have contact with senior management, but do you have any contacts at these companies? How do you build those relationships? Do you need those relationships?

[00:08:24] Rob Vinall: Yeah. I wouldn’t necessarily say, need. I would say, love. One of the things that motivate me and the reason I’m sitting here today is the relationships that come about through investing. And that’s of course, part with my investors. It’s with, of course, all of you people here today.

I wouldn’t necessarily say, need. I would say, love. One of the things that motivate me and the reason I’m sitting here today is the relationships that come about through investing. And that’s of course, part with my investors. It’s with, of course, all of you people here today.

But it’s also with the managers that run the business. I think I find managing a business a fascinating and fulfilling job to do, and getting to know those managers, hearing the problems they encounter, how they solve them, and the successes, and the failures. That’s a journey I love to go on.

And the question that sometimes comes after I say that is well, how do you maintain your objectivity then? If you’re so close to these people. And of course, the response is well, I’m probably not particularly objective, but I don’t think that’s always such a bad thing. People are not objective when they choose a spouse or a career. These are all very subjective things and I think sort of passion on balance is very additive to that process. Maybe you could talk more about our sort of interactions and stuff.

[00:09:35] Andreas Lechner: We usually meet a lot of management and conferences and visits to headquarters, and we want to visit every CEO, every management team that we invest in. There are exceptions. If it’s a huge company, obviously, they will not want to see us. It’s not 100% required because when a company is big, you usually find enough public material on YouTube where they were interviewed. And so I think it’s very important to make sure that your own vision as an investor of a company where the company should go and why you invest it is in coincidence with the management’s vision and there is no other way than to talk to them to find that out. So that’s why we want to visit all of them, and with some exceptions apply but yeah, that’s how we think about that.

And so I think it’s very important to make sure that your own vision as an investor of a company where the company should go and why you invest it is in coincidence with the management’s vision and there is no other way than to talk to them to find that out. So that’s why we want to visit all of them, and with some exceptions apply but yeah, that’s how we think about that.

[00:10:38] Rob Vinall: Yeah, and I think on the large companies like for example Facebook, there’s plenty of videos and interviews with Mark Zuckerberg out there to see how he thinks about it.

[00:10:48] Andreas Lechner: Exactly as they want to know what the vision of the management is. I’ve learned it a hard way. I’ve had one investment in a Norwegian company that had two business areas and I was invested because I thought highly of one of the two business areas, but management thought vice versa and sold this one business area for quite a cheap price. So yeah. But they didn’t take my calls. I shouldn’t have invested in the first place. It was a rather small company, and they didn’t take my calls and I couldn’t make sure that both of our visions were aligned.

[00:11:29] Rob Vinall: Who’s next? I see some of the back with you. Hi, Pratush.

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Large Drawdown

[00:11:32] Pratush: Hi Rob. Hi Andreas. It was a tough year last year for stock pickers in general. When you have a large drawdown, last year, there’s some math that goes behind coming back to what you were, right? So if you’re down, whatever, 50%, it’s not like you can just go up 50%. You have to double to get back to where you were. What do you think about that? Is there a plan on how you might do that and not maybe necessarily a plan, but how you think about what you might put into the portfolio or take out of the portfolio?

[00:12:07] Rob Vinall: Well, Andreas is our resident mathematician. He won a lot of prizes for maths at school. If I remember correctly. So yeah, the. So you could take the mathematical part of that in terms of how I’m going to manage the fund. I’m glad the question came along. It was a big drawdown, but it won’t change how I’m doing things. There’d be no risky bets in order to try and win back what was lost or anything like that. My aim when managing your capital has always been to try and compounded at a decent rate. My goal is always 15%. That’s an aspiration as opposed to a promise. And it’s still 15% a year. And if it’s more than that, that’s great, but I won’t stretch for more than that just because we had a big drawdown last year.

So you could take the mathematical part of that in terms of how I’m going to manage the fund. I’m glad the question came along. It was a big drawdown, but it won’t change how I’m doing things. There’d be no risky bets in order to try and win back what was lost or anything like that. My aim when managing your capital has always been to try and compounded at a decent rate. My goal is always 15%. That’s an aspiration as opposed to a promise. And it’s still 15% a year. And if it’s more than that, that’s great, but I won’t stretch for more than that just because we had a big drawdown last year.

[00:12:57] Andreas Lechner: Yeah, and actually where the portfolio was at some prior point in time should not influence your investing strategy. You should at each point in time make one rational decision after another. Even if you made a mistake in the past, you have to move on and not make that mistake again. But you shouldn’t invest in a different way just because the portfolio was 100% higher maybe a year ago.

Yeah, and actually where the portfolio was at some prior point in time should not influence your investing strategy. You should at each point in time make one rational decision after another. Even if you made a mistake in the past, you have to move on and not make that mistake again. But you shouldn’t invest in a different way just because the portfolio was 100% higher maybe a year ago.

So in that sense, I think Rob will continue managing the portfolio.

[00:13:30] Speaker unknown: I think I got the mic.

[00:13:32] Rob Vinall: Just lift a hand. I can’t see you.

Scenario: Starting over again with your own private money

[00:13:34] Speaker unknown: I’m here to give you a little bit of time to breathe for the difficult question. I have a completely different direction. If you would start over again, totally like without a fund, with your private money, would you invest anything in different styles like focusing on a smaller company’s net, or even special situations? Yeah, basically that’s the question.

[00:14:03] Rob Vinall: Yeah, thank you. I think we see this quite similarly. You see a lot of literature around how there’s more market inefficiency in smaller companies and large companies, we just disagree with that. There are plenty of very smart people following small companies, and there are plenty of smart people following large companies. We don’t see any structural inefficiency. Now, of course, things come and go in cycles and at any moment in time it might be the case that a large cap is very out of favour, and of course vice versa, this can also be true, but we’re pretty agnostic about whether we invest in large or small companies.

[00:14:41] Andreas Lechner: It’s about the quality of the business, not the size. In fact, large companies can be as inefficient as small ones. One of my largest investments is Microsoft, and it’s been so for 12 years. I’ve pitched the Microsoft idea to many other asset managers. But they tell me they cannot put that in their portfolio and collect fees on that because it’s a too simple idea and I think that by itself creates inefficiency in such names.

[00:15:17] Rob Vinall: The one thing I would say we’ve got Jacob McDonnell here and so I think this will be a good topic for tomorrow, but he wrote a wonderful book about Buffett’s early investments and Buffett was focused on these sorts of quite smaller companies with a lot of cash in them and let’s save that discussion for tomorrow.

Position sizing

[00:15:36] Speaker 9: Yeah, I would have a question. I’m wondering what you’re thinking about position sizing. Do you use the Kelly criteria on half of Kelly? Or do you say, okay, I’m starting with all equal weight? What do you think about rebalancing positions? Do you do that? Do you trim positions at all? Yeah, that’s my question.

[00:16:01] Rob Vinall: Yeah, I mean, I think our portfolios are quite similar and we both invest in a very concentrated way. So the business owner fund has typically had roughly 10 companies in it. Maybe sometimes it was nine, sometimes 11, but it was always around about 10 and I was self-taught as an investor. And when I started investing my own money. I only ever had 10 companies because it’s difficult to know more than 10 companies well. And of course, to invest in 10 you probably want to analyse at least 50 or something. So just from a logistical perspective, it would have been difficult to invest in more than 10.

But also when you’re investing your own money and especially when you’re younger and maybe you don’t have so much money when you have a good idea, you want it to make a difference to your net worth. So like if you have this amazing idea and you put 1% of your capital in it and it goes up three times, then congratulations, you’ve got a 3% return. You could have got that by investing in cash. So I think 10% for me has been a good sort of level where it can make a difference to the performance of a thing if a company does well, but the flip side is if a 10% position goes to zero, which shouldn’t happen too often. But even if it were, it would be a mistake you could very easily recover from.

But also when you’re investing your own money and especially when you’re younger and maybe you don’t have so much money when you have a good idea, you want it to make a difference to your net worth. So like if you have this amazing idea and you put 1% of your capital in it and it goes up three times, then congratulations, you’ve got a 3% return. You could have got that by investing in cash. So I think 10% for me has been a good sort of level where it can make a difference to the performance of a thing if a company does well, but the flip side is if a 10% position goes to zero, which shouldn’t happen too often. But even if it were, it would be a mistake you could very easily recover from.

[00:17:24] Andreas Lechner: I may add one thing, one thought about the Kelly criterion. I mean, the Kelly criterion is just a mathematical concept that applies to a situation where you have a strictly defined game. Let’s say you’re flipping a coin and the game is beneficial to you. You have a slightly positive expected value and a certain variance. And then you can say okay, what is the optimal betting size with each game so that the capital grows as fast as possible?

And you have no risk of getting a zero or very little risk of getting a zero because you lose 10 games in a row or something, but you don’t have these clearly defined circumstances in the financial market. You have a rough idea of what the risk of each company is. But it’s not clearly defined that you say you have a coin that has a 60% probability of. Well, let’s say a 50% probability for each side, but a slightly higher outcome on one side than on the other where you can calculate the outcomes, so I wouldn’t say this applies, but just qualitatively speaking, the higher the risk, the lower the allocation should be.

And another thought on the diversification. Many of the companies I own and also Rob own more than one business. I mentioned Microsoft before they are intrinsically diversified because they have Windows. They have Office. They have gaming. They have LinkedIn and Bing and so Azure, of course. So there are so many businesses inside Microsoft that they, I would say, count as more than one position. I personally would go below 10 positions if I don’t have 10 good ideas, I would rather have fewer, fewer ideas than more ideas which are mediocre.

I personally would go below 10 positions if I don’t have 10 good ideas, I would rather have fewer, fewer ideas than more ideas which are mediocre.

[00:19:22] Nate: Question from the Internet.

[00:19:25] Rob Vinall: Oh yeah, let me just take the opportunity to introduce Nate. Nate has been our resident question-asker from the Internet for the last few years. Quick applause for Nate. He kindly handed the baton over to Nate. So Nate thank you for taking that over.

Questions on Ryman

[00:19:44] Nate: Very dangerous. A couple of questions on Ryman and just to summarise this, Just your perspective on the potentially deteriorating environment with concerns around its debt loads and how you balance the short-term concerns of the move and share price and your long-term focus on the business?

[00:20:02] Rob Vinall: Yeah, I mean they’re in a tougher environment now. Not sure what question I was referring to. There are different parts of the business in which we’re facing certain challenges, so the property market prices are declining as you heard this morning. There are the key beneficiaries of the price. When they sell a property, they make a profit versus what their cost was. The important thing to realise is that if you think about it from when they sort of break ground on a village to when they sell it for the first time and when from the time when they sell it from the first time to the second time it’s probably depending on how long it takes to get it permission and then built and everything. It’s probably about five years from the breaking ground to the first sale and depending on how long the residence stays in the property on the second sale, it’s potentially about six or seven years, so we’re not comparing.

So when Ryman makes a profit, when it sells a house or unit today, you’re not comparing it to what the price was a month ago or six months ago, it’s based on what the price was six years ago or even ten years ago. And there’s just such a huge margin of safety. There’s been just such a staggering increase in property values in New Zealand, and Australia that quite a lot more would have to happen before we’ve got even close to a situation where they wouldn’t be making money on those sales, and in fact, it’s almost a certainty on the resales that those margins will continue increasing.

And then another area where they’ve struggled is on the care side and as David said, this morning care used to be very profitable. The government hasn’t sort of kept up the reimbursement with inflation. And as a result of that, Ryman has seen a deterioration in its economics, and that’s created a lot of pessimism in the market, which frankly, I don’t share. A lot of the competitors who haven’t invested in care as a sort of patting themselves on the back and saying, look how smart we are. We’re not overly exposed to this area, which isn’t very profitable. I think that’s idiotic. When you move into a Roman village, of course, you care about the quality of the house and that it looks nice and all that stuff, but ultimately the service you’re buying is access to great care.

The idea that you can sort of arbitrage that needs from the market away just by building the houses and not the care is ridiculous and why Ryman is such a great business. And I suspect financially in the medium term it will also work out very well as well, because in the same way, as most younger people here. So like if you have a family with children and you book a sort of hotel for the vacation, you pay for the room, you don’t pay separately for the pool and the kids club and all that kind of stuff but it’s like a big part of the reason or whatever price you’re willing to pay for the room.

And in the same way, if there’s no care available in New Zealand or Australia, then people will just pay more for houses in order to get access to that care. So I think in both respects it’ll work out fine and in terms of debt, you read in my letter which I sent out the day before yesterday that I dislike debt. I hate debt. It was a mistake I made on Carvana, investing in a company which was overly indebted. I don’t like to see the debt at Ryman. I’ve written to the board on several occasions saying I would prefer the company not to have debt. That being said, it’s a very different situation. This a property company with large, very valuable real estate. It’s very, very low-risk debt from the perspective of the lenders. They have great long-term relationships with the lending banks, so I’m not concerned about that at all. Although I would prefer it not to be there, and if anyone from Ryman is watching this or seeing a recording of it let’s get lower the debt, please. And if you want to say there.

[00:24:22] Andreas Lechner: No, I have nothing to add.

[00:24:27] Speaker 7: All right, quick question from my side over here. Yeah, thank you all for having us, Rob. Two questions.

[00:24:33] Rob Vinall: Thank you for coming. Is it OK just to do one because? You look there are quite a few. So choose the toughest one and give it to Andreas.

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How does it feel to know that you provided value in your worst year? Second, what do you think about Grenke?

[00:24:39] Speaker 7: It’s like one tough one, one nice one. So I’m just trying to give you an easy time because looking at when you start in 2008 till now as appears roughly doubled investors, and your money is roughly four times the money. How does it feel to know that you provided value in your worst year? Second, what do you think about Grenke?

[00:25:00] Rob Vinall: Yeah. Well, thank you. Thank you for the first question, which was very kind. A big motivational factor for me is helping my investors to solve their financial needs. I have some very large investors like endowments, where the money goes towards education and for underprivileged students and some very small investors where the savings are towards sort of school fees, maybe a holiday home or a first home and all that stuff and I’m delighted about the job I’ve been able to do for investors who were there since the beginning.

I’m very disappointed with the experience people have had who perhaps only invested a year or two years ago. I’m going to stay around here for a long time and this has been a bad year, but there’ll be better years, and sometimes one person asked me, I don’t think you could have known me too well, asked me something along the lines of now the high watermark for the fund is so far away. Are you going to shut the fun down and start a new one? I’m not even going to respond to that. And then on Grenke, anything, in particular, you wanted to hear about it or…?

[00:26:17] Speaker 7: Overall, generally, your opinion about Grenke. Just overall.

[00:26:21] Rob Vinall: It’s a company I’ve been invested in since day one of the firm. I know the company incredibly well. They’re incredibly high quality. People working there. It’s an incredibly high-quality business. When I first invested 15-plus years ago, it’s been a great investment and it’s still a great investment today. If you look at the last two years or three years, they’ve had two pretty tough setbacks, which would have killed a lot of companies. The first one was COVID. They sell to a lot of like old economy style physical retailers, restaurants, that kind of stuff, the type of business that was hurt by COVID.

So that was a huge body blow to the business and then just when they were sort of recovering a little bit from COVID, there was this short attack with short sellers making all kinds of fantastical allegations against the company, nearly all of which have since been completely disproven. So it had a very rough three years. That’s why the share price is where it is, but the business is doing fine. I guess a glass-half-empty point of view is this company had three very tough years, but I think it’s a glass-half-full perspective is if you can go through all that and still be around and be profitable to have lots of capital, then it’s a great indication of just how resilient the business is.

I guess a glass-half-empty point of view is this company had three very tough years, but I think it’s a glass-half-full perspective is if you can go through all that and still be around and be profitable to have lots of capital, then it’s a great indication of just how resilient the business is.

[00:27:57] Assafe: Hi Rob. Here. Assafe from Israel. First, I want to wish you very good health. It’s the basis for everything and I wish you will manage the business owner fund for many, many more years to derive much more pleasure from it.

[00:28:10] Rob Vinall: Thank you for making the trek over from Israel with your friends. It’s always great to see you.

[00:28:14] Assafe: Yeah, it’s a habit. It’s already a habit so.

[00:28:18] Rob Vinall: I’ve been reciprocating. I’ve been trekking to Israel quite recently as well recently.

Investment in Carvana

[00:28:22] Assafe: So my question is a bit, I think, unpleasant, but I think it’s a must. First, I just want to mention that John Hampton wrote a very nice piece. About how he manages mistakes that he makes in the portfolio. For instance, he made an example of a 4% position hurting the performance, like in 15% when it goes down, it just increases it, and it goes down again 50%, it increases it, and then eventually a small position can kill the portfolio. So he has a very nice piece on how he manages his mistakes. So I was wondering after you realised that Carvana is probably a mistake. So how did you manage? I mean when the price goes against you. You can be a contrarian, but sometimes the market is right, and the investor is wrong. So I was wondering, how did you manage the investment in Carvana along the way? I mean declined and did you add? Did you think about selling? I mean how? How did you manage this mistake?

[00:29:27] Rob Vinall: Thanks for the question. That’s a good question. A lot of you have followed the portfolio over many years and you’ll know that every company I’ve ever invested in has been through at least one crisis or multiple crises where it looks like there are plausible reasons or people making arguments why the company is challenged or in some cases there have been accusations. Even some of the companies were fraudulent. And when that happens, there tends to be a huge drawdown in the price of the company, and that’s sort of the moment of truth for us as investors, right? Do you panic and sell and to the extent the allegations are right, it would be probably a good thing to do? Or do you double down and buy more which is the right thing to do if your analysis is ultimately correct?

I’m a contrarian. Andreas is a contrarian as well. My instinct when everyone is against a company, and I believe that it’s a good investment, is to buy more of it. And that’s something I’ve done on multiple occasions, and it served us very, very well.

I’m a contrarian. Andreas is a contrarian as well. My instinct when everyone is against a company, and I believe that it’s a good investment, is to buy more of it. And that’s something I’ve done on multiple occasions, and it served us very, very well.

But of course, at some point, there’s going to be an investment that goes down and it goes down for very good reasons, but I don’t just keep doubling down, doubling down, doubling down.

In the case of Carvana, the main position was built in the first quarter of this year, and I think I added a very small amount in Q2 and an even smaller amount in Q4, but nothing which was needle-moving and the situation now is well, we’ll have to wait and see a few more years to see what the full situation is. But I guess the question is what does that mean? And it means although I’m willing to sort of bet against the market if I think the market has got things wrong, I’m not going to bet beyond an irresponsible level and you know Carvana hurt, but it didn’t kill us. Your thoughts on doubling down?

[00:31:42] Andreas Lechner: Well, I will not double down if it just moves slightly down but it has to be a significant new opportunity that you were willing to allocate a lot more capital. I had a similar situation, not in Carvana and I’m not that familiar with that company, but with Meta which we also both own. I initially bought it in 2014 and then added it in 2018 and it became a big position in the subsequent years as the stock price moved up and now it is down a lot. But one has to acknowledge that certainly, the intrinsic value has also deteriorated somewhat due to all the scandals they’ve had. You have to take that into account when you make the decision to double down, so it’s certainly a different proposition right now than it was a couple of years ago or it was in 2014.

Yeah, so, I would double down but you have to make sure that it’s a good price that you’re offered, not just double down because you say I paid double the price a year ago and it must now be a great value. No, you have to sink from zero again and make sure that the story is still intact and only then at down when you are absolutely sure that this is the best value-adding move you can make to the portfolio. You could also buy some other company.

[00:33:24] Rob Vinall: Makes sense. Florian?

Metaverse investment

[00:33:26] Florian: I just wanted to expand on your comments about Meta. Andreas, you’ve been an investor for a long time, and I remember Rob, last year, you mentioned your basic hypothesis on your Meta investment and you were very bullish about their prospects, despite their heavy spending on R&D like this 10 billion spending which you can see little impact on the bottom line so far. Just wondering over the course of the year as the share price is half once again, did you expand on these positions address? Did you or Rob, what are your views on that? And is the basic hypothesis still intact, or are they like any reflections on how the situation might have changed for this company?

[00:34:26] Rob Vinall: You want to go first on that?

[00:34:27] Andreas Lechner: Yeah. First some words on the 10 billion investments in the Metaverse, you have to see there is a component of creating credibility to it. Back when they started the Metaverse. They wanted to establish a new mobile application platform next to iOS and Android and you cannot just do that if you’ve Meta her by saying okay, let a vice president to the presentation. And spend half a billion per year on that. No serious app developer will develop or dedicate people to this new app platform and develop applications when he can just use the same people to develop applications for iOS or for Android. So if your Meta you have to show that you’re serious and you show that you’re serious by having the CEO to the presentation by renaming the company, and by saying you spend 10 billion a year. So there is no other way if you want to succeed in that sector, and there is no way of acquiring the leading Metaverse play in five years because they’re not even allowed to acquire some company like Giphy anymore from a regulatory antitrust perspective. So they have to build the businesses themselves.

And it’s quite common in the high-tech industry. If you look at Amazon and Google, they have all projects where they invest billions of dollars every year and lose money. Some of them turn out well and some of them don’t. So as an investor, I just set aside, let’s say I reserve of 50 billion for the Metaverse. The negative value that this may create over the next five years and in five years it’s either successful or it’s failed. They close it down in five years or it succeeded. And I just approach it from some of the parts’ perspectives. Evaluate the operating business, the core business that they have and value the Metaverse maybe with a -50 billion, and I think I’m on the conservative side for that.

[00:36:39] Rob Vinall: I mean, I’d have to listen back to what I said in March, but I would say on balance, I would say maybe even more bullish today than I was then. If I go back to March ATT, which was the main thing which has harmed Facebook over the last two or three years was already well established. It was clear that was going to negatively impact his cash flow, but I think from the perspective of last March, the biggest fear I had was around sort of TikTok and the potential for TikTok to take engagement away from the Facebook family of apps, and in that respect, I think the market share gains have TikTok has flattened and I think Facebook is having incredible success with reels. I saw that it’s, I think, 20 or maybe 30% of page impressions are now reels which haven’t yet started to be monetised. So yeah, I would say that’s one where I’m still pretty optimistic. What about you?

[00:37:36] Andreas Lechner: Well what we’ve seen so far is Apple’s action of disabling or requiring consent to tracking. But we have not seen Facebook’s reaction yet, so they’re rebuilding the advertising stack right now, they are investing in AI. Much of this data centre investment that they planned for last year and this year 30 billion, last year 40 billion, and this year 70 billion in total are going into AI capacity which helps with analysing the videos in the reels, so what topics are they on, tagging them, and matching them with ads. So I’m quite optimistic that something great will grow out of that. I think the AI capabilities within Facebook or within Meta are nothing short of what we see at OpenAI with ChatGPT. But they just don’t use it for a chat, but they use it for advertising placement. And we’ll see that over the next year.

[00:38:39] Rob Vinall: Thanks for the question.

Changing of style

[00:38:41] Assafe: Another one for me if it’s okay. So for the 10 years of business owner fund, you wrote a very– one of the best letters I’ve ever read, I think, for the decade for the business owner fund and you documented the history of how you changed your styles over the years. And there’s a paragraph in the letter that said that you are willing to change your style if the market values less cheap companies you buy cheap companies and you will be able to sell the compounders and stuff like that. So I have two questions. Do you think that the market has changed and now you need to change your style? And do you think that you are able to sell all of the companies that you value so much in order to manifest this changing style?

[00:39:36] Rob Vinall: No, I wouldn’t say that. I mean, I would say the style is sort of being tweaked as opposed to changing. I mean, this is something I talked about in the letter from a couple of days ago. You know, every time you make an investment, you’re learning something from it. It might hopefully be something positive. But it also might be negative.

You know, every time you make an investment, you’re learning something from it. It might hopefully be something positive. But it also might be negative.

And then of course, that flows into future investments. And that’s the point I tried to get across in the 10-year letter, and I think that’s something I tried to describe in the most recent one. For example, I mean, there are lots of different examples I can give but you know increasingly, over the years I’ve been more attracted to companies where the earnings are bigger, but further out rather than like having a relatively stable stream of earnings today and paying a low multiple for that. I’d rather look a little bit into the future and then pay an even lower multiple for earnings, which are much, much further out. And that’s still very much my belief as an investor, you’re just trying to buy cash flow as cheaply as possible, and I think by taking a longer-term view, there’s an opportunity to do that.

But there are also drawbacks. If you look too far into the future because it comes more uncertain. Lots of things can change. If there isn’t a lot of cash flow in the present, that can also create problems. It can create opportunity cost if there’s not an opportunity to buy back stock and all that stuff. And permanently sort of playing with the recipe and trying to figure out what is the right balance to strike, but I would say the broad strokes are pretty much set. Yeah, and I love the companies where we’re invested in. If I thought they didn’t meet those criteria then, of course, I would sell them. And one or two things I have sold but you know, in general, I like what we own.

[00:41:37] Andreas Lechner: As two mistakes, I think and how they should influence your investing strategy, I think there is a danger of learning too much from your mistakes because we have a concentrated portfolio. And let’s say we have one mistake every year or every second year or whatever then if I changed my strategy all the time with every mistake, we would give much more weight to the recent past and not to all the times that this strategy may have worked prior to that. So it’s a bit like playing roulette, and you bet on red, black comes up and you say damn it was a mistake betting on red and then you bet on black and then red comes up and you say, oh it was a mistake betting on black. So you have to always go back to when you made a decision to invest. Was it a mistake with the information you had available at the time? And if you conclude that well with the information you had available at the time you made a rational decision, then it was not a mistake.

About Wix

[00:42:53] Nate: A few questions from the Internet. This time on Wix. Rob, what’s your current view on the outlook of the company and how do you feel about some of its spending on headcount headquarters and other things over the recent years?

[00:43:07] Rob Vinall: Yeah, I mean, Wix, I’m very positive about. I don’t pay too much attention to quarterly earnings as I’m trying to figure out what things look like in the distant future. That being said, I think there’s a question mark around Wix and many of those sort of companies in that sort of tech space of whether the businesses work and whether they’re profitable and I think in the coming few quarters you’re going to see some huge jumps in earnings in Wix, Israelis and known for being very aggressive and good business people. I think they were overly aggressive in the way they built out the headcount. And invested in the last, in the boom phase, but what I’m hearing is there being equally aggressive now in the other direction of right-sizing the business and getting back to profitability and if there’s a question mark about whether that type of business is seriously profitable today, I’m pretty sure that won’t be a question mark in a years’ time. Anything you want to add?

[00:44:18] Andreas Lechner: I have no strong opinion on Wix. Thank you.

Taking advantage of declining markets

[00:44:24] Speaker 10: I would like to ask if you took advantage of recent declining markets in increasing your shares or if you are satisfied with enough cash that you were holding before this market route or if you would like maybe to holding mortgage before that? Thank you.

[00:44:42] Rob Vinall: It’s very kind to draw attention to the market drawdown but the portfolio drawdown was actually a lot bigger, so I think if it’s just based of the price action, probably there were bigger price moves within the portfolio rather than looking outside of it, so the last year as I wrote I didn’t add any new positions. I added to some positions, and reduce some other ones a little bit, but I think the portfolio at the end of the year was not massively different from the way it looked at the beginning of the year.

[00:45:17] Andreas Lechner: Well, I think also we are not holding cash by design, but we are trying to be fully invested, which doesn’t mean that on the day we sell something, we immediately buy the next thing. But we don’t want to hold cash because in general there is an upward bias in the stock market, and we don’t want to miss out on that. From that perspective, we will have good years since we are fully invested when the market is doing well and we would have pretty bad years occasionally. This is by design but it should work out to our benefit over the long term.

[00:45:52] Rob Vinall: And the important thing is to have investors who are aligned with that. And in that respect an enormous thank you to my investors, the loyalty has been quite incredible. I think for every call I had about whether they should withdraw money, I think I had probably two and whether they should put more money in. So thank you for that.

About the culture of the company

[00:46:16] Speaker 11: Hi Rob, thanks and thanks for having me and Andreas, welcome. My question is about culture. It has been a huge part of your investing strategy to figure out the culture of the company, like the employees and how they feel. With the recent changes in the tech future and the present, do you feel like there is going to be slow degradation and how are you going to act on that or what is your plan basically in that regard? Thanks.

[00:46:46] Rob Vinall: Thank you. I mean, culture is incredibly important. For me, it’s like an operating system for a company. You can’t create a manual saying what to do in every possible situation, and so I think the culture is what gives people a sort of a lodestar if you will, of what to do, and the best company’s cultures were changed because of the downturn. What perhaps you will see is, I think, a lot of companies where when things are going well. And the share prices going up and people’s stock options are going up. People will probably say this is the best company in the world and we love working here and we never work anywhere else. And then maybe things are going less well, and some headcount is being reduced and stock options are not as worth as much as they were before. All of a sudden, they’re like, oh, this company, they’ve lost it, they’re no longer what they used to be and all this stuff. For me, that is just sort of people responding to the stock market action, but that shouldn’t change companies with a strong culture. It won’t change Ryman’s culture that the share price is down this year.

[00:48:02] Andreas Lechner: Not much to add, but I think it also comes down a bit to what we said previously about getting to know management. So I think Rob and me, we ask ourselves is this a guy I would want to work for? And because if it’s a guy that I don’t want to work for then he may be creating a corporate culture that has people inside that work just for the money, nor the out of some intrinsic motivation, so it helps. Rob says sometimes be friends with the CEO, but I wouldn’t put it like that, but respecting him and having a situation where you want to work for this guy. [crosstalk]

[00:48:57] Rob Vinall: Imagine being a friend.

[00:48:59] Andreas Lechner: Exactly.

[00:49:05] Rob Vinall: One of the back and hand up in front.

Investing principles

[00:49:08] Arnie: Hi, I’m Arnie from Italy. I wonder about investing principles. What principle do you think is true but most investors, well investors and not, don’t agree on?

[00:49:22] Rob Vinall: Thanks for that question. I mean it fits quite well with what we’re last talking about. I mean, Andreas and I both think it’s incredibly important to understand the people running a business and what motivates them, what their values are. And in fact, it might even be the most important thing to figure out. You know, obviously, the business model has to work and all that stuff. No one can make a business that doesn’t work great. But assuming all that’s the case, we think people are the most important factor. And that’s a controversial view. There are a lot of investors that don’t pay attention to it. They think if you just make sure the incentive programme is right, everything else will take care of itself. We don’t think that we don’t think managers should be financially motivated. Primarily, of course, they should be properly paid, and they should enjoy their success, but that shouldn’t be the main motivation. And there are a lot of investors who say you shouldn’t meet with management even because you shouldn’t allow however they behave to be to influence your investment decision. And yeah, I just disagree.

[00:50:36] Andreas Lechner: Well, this may be where our styles are a little bit different. I do think that I come away a little bit biased from meetings with management, but still, they are important, and you have to correct them a little bit for that positive bias. I always come away thinking there are good people, and so I made myself the rule that if I come away from a meeting thinking there are good people, there must be average people. And I have to come away excited to put in my notes that they are great people.

[00:51:11] Rob Vinall: Yeah, you wouldn’t probably make an investment decision directly after a meeting?

[00:51:15] Andreas Lechner: No, no, no, never. Of course, obviously, in fact, speak louder than words.

[00:51:20] Rob Vinall: Okay, anything non-management related that you think the markets miss that you think is important?

[00:51:29] Andreas Lechner: I cannot come up with something about it, but probably…

[00:51:33] Rob Vinall: Have a think and come back to us then.

[00:51:35] Rob Vinall: Okay, any other questions? At the front here.

Question about Alibaba

[00:51:38] Speaker 11: Hi. I have a question on Alibaba which I think was in the portfolio of the top ten last time around and isn’t there right now. I mean what are your thoughts on it? And at the exit of the position?

[00:51:41] Rob Vinall: Yeah. So Alibaba was a very small position and I bought it with the intention of making a sort of mini portfolio within the portfolio of Chinese companies. And So what I sort of envisioned when I bought Alibaba was buying probably one or two other companies as well, so it would have been probably four or five stocks which I would view as quite concentrated in that it would have been a five-stock portfolio, but obviously in the context of the overall portfolio would have been more diversified and the reason I stepped back from that was it just didn’t sit easily.

I’ve always been a concentrated investor and always felt If I’m not willing to put at least 10% in the company and then I should probably not put anything in, and the opportunity in Prosus was and possibly still is so great. I didn’t want to diversify out of Prosus into Alibaba. I think Alibaba is a very good business. I think it was and still is an excellent opportunity in the sense that it’s a good business trading at a very low price, but I thought Prosus was a much, much better opportunity. Tencent has a better business. You had the value creation from the potential closing of the discount, which we didn’t know at the time, we now know Prosus is being very aggressive in buying back stock to close that discount.

The great thing about Tencent as well is it has a huge private equity portfolio. So when you look at the multiples of the company, which are already quite cheap, if you then bear in mind almost half of the market. Up at one point was in a private equity portfolio completely unrelated to the operational business. It was, probably still is, an incredible opportunity, and so I just wanted to have a huge position in that. It was more of an active decision for Prosus as opposed to a sort of decision against Alibaba. Andreas isn’t a China fan, so I’m going to try and move on quickly to the next question. Do you have a mic? Oh, there’s one now. Yeah, go ahead. Yeah.

About Credit Acceptance

[00:54:15] Speaker 12: Hi, thank you. I have a question about Credit Acceptance. So Credit Acceptance has had a lot of new facts recently. The first one was that they changed the way they fund them. The fund, where they went to one lender for 200 million announcing December, and that’s supposed to be what they used to do, they go to the ABS market and they have an extension of 24 months to 36 months, which implies that they need to renew default loans with new loans and that loss goes to the equity. That means it’s a lot riskier business today, in one aspect. The second aspect, higher interest rates affect them a lot because they sell like the interest rates that they give to the borrowers are at the highest in each state, so there is no margin on that. And the third one, sorry, no third, there are fourth. So third one, is you have now, of course, the regulatory having a massive lawsuit for predatory lending practices and several states are investigating that as well.

And fourth, we are in a scenario where the second like the used car market is plummeting and it’s very, very challenging right now for several companies, so that means when they repossess a car, they’re going to sell it in a supermassive discount, so these are huge facts for the companies, especially for future earnings. Do they not move the needle for you to change a cell or do something? If not, what set of facts should they occur well and make you move the needle? Thank you.

[00:55:51] Rob Vinall: Are you long Credit Acceptance by any chance?

[00:55:54] Speaker 12: I don’t like it.

[00:55:56] Rob Vinall: It sounds like you’re not a fan and that’s fine.

[00:55:59] Speaker 12: No, no, no.

[00:56:00] Rob Vinall: I am a fan. There was a lot of detail in there about sort of interest rates and used car prices and stuff. This is probably not the forum to go into that sort of very deep detail. I would say at a high level though, I disagree, sort of 180 degrees with the basic thrust of your argument, which was things are getting tougher for Credit Acceptance. I would say things for the last few years they’ve had sort of a headwind to their business. They’re a very disciplined lender and they had a huge, they had some huge declines in the number of new loans they were able to originate over the last two or three years because, in a very hot market, there were lots of new entrants coming in making crazy loans at crazy prices.

And that situation has changed in the last six months, and we’re now entering a market which is fantastic for Credit Acceptance. So higher interest rates. Of course, all things being equal is bad for any lender, but things aren’t equal. You know, Credit Acceptance has a 30% of its book financed with equity. A more typical lender might have 10%, so they’re much more effective by increasing interest rates. So while it might be in an absolute way bad for everybody on a relative basis, it vastly improves Credit Acceptance’s position.

Ditto for repossessing the repossessed cars which get resold. You know, if you’re repossessing a car and selling it for less, then yes, in an absolute sense, that’s a negative for the business, but in the sense that other players are much more negatively impacted by that it’s a very strong tailwind for Credit Acceptance business, so I think we might have to agree to disagree. But I do think this year you will see very, very strong growth in originations from Credit Acceptance. I mean that that’s already clear, there may be a little bit of turbulence on some of the older loans where maybe they collect a little bit less than they expected, but I’m pretty sure that will be overwhelmed by getting much better economics on the new loans they write.

And you saw that in the financial crisis in 2008, 2009. From memory, we want to remember that was a disastrous situation for any subprime lender. From memory, I think they doubled their earnings between the start and the finish of the crisis, so this a business that does well when times are tough. Yeah, just take a little bit of feedback on the mic. I don’t know if we should turn. Okay, thanks.

About Facebook

[00:58:58] Speaker 13: Thanks Rob and Andreas for hosting. Rob, you mentioned that you feel probably better about Facebook’s prospects today than you did a year ago and you didn’t just mention the valuation difference. You also talked about a headwind that’s abated and as you look across the portfolio, other names were either headwind have abated, or maybe new headwinds have come up. And that has sort of changed your investment hypothesis over the last couple of years. Thanks.

[00:59:20] Rob Vinall: This something I tried to address in my half-year letter, where it’s like when there’s a big drawdown. The question is okay, which ones are? Because you think the intrinsic value is down a lot and which is where the market is maybe just sort of turned more unnecessarily pessimistic and I think we talked about Prosus. We’ve talked about Meta and Credit Acceptance. I think these are all examples where the market has turned more negative, and I don’t share that. What about you though Andreas?

[00:59:58] Andreas Lechner: I think the market is certainly more rationally priced right now than it was in a couple of years, though we are not in the distressed territory. It’s not like 2009 or 2003 all over again, so it’s somewhere in the middle, normally priced.

[01:00:17] Rob Vinall: Yeah, which is where the market is most of the time, right? Who’s got a mic? I see lots of hands.

Reading time

[01:00:26] Speaker 14: Hi guys, thanks for having us here. I had a question about how you prioritise your reading time. So how much are maybe current companies in the portfolio versus new ones you might be interested in versus studying new technological trends or reading history books and biographies and how has that changed over time?

[01:00:49] Rob Vinall: You know, I think there’s sort of a cadence where there tends to be a lot of information around quarterly earnings report time on companies you’re invested in. So I would say that takes up around that quarterly earnings season. You know, I don’t pay too much attention to quarterly earnings, but like a sports fan, I want to see how our companies are getting on and also, of course, potentially there could be some very good or very bad news in a quarterly earnings report. So I would say in that sort of those two or three weeks where there’s a lot of quarterly earnings that takes up a lot of time. And then in the remainder of the time, it’s probably divided more equally between existing and new opportunities. You know, doing calls with experts, doing basic research into industries, talking to new company management. All this stuff happens probably the remainder of the time. How about you?

[01:01:48] Andreas Lechner: Yeah, of course. Also, it depends a bit on what new markets open up, and what new technologies become available. I spent a fair bit on ChatGPT, for instance, because it sounds like a technology that could influence a lot of public companies and including the ones I hold.

[01:02:03] Rob Vinall: Maybe should say what chat GTP is in case people aren’t familiar with it.

[01:02:07] Andreas Lechner: It’s a neural network that was developed by open AI, and it’s a chatbot. You can enter some query into that and it will answer the text. The answers are quite impressive. I would say you cannot easily say that this is a robot that you’re talking to. It may just well as well be a human and this is just the beginning. In five years, we would have a much better. I was playing around with ChatGPT too, a couple of years ago and was training in on the Buffett letters and telling it to generate a new Buffett letter out of that. And the result was not very impressive at the time, but what I have seen so far with ChatGPT was impressive and–

[01:02:57] Rob Vinall: For me, it was like an aha moment. I remember very clearly when I was in, I think it was my first or second year of university in would have been, I guess ’92, ‘93 or something like that and someone from the computer sciences lab called me up to the room and said you’ve got to see this, you got to see this and he uploaded a web page and it sort of slowly this web page is sort of literally one line by line and that pixel was built up until there was an image on the screen. Given I was a student at the time, I’m not going to say well that image was but it was an aha moment where you saw, well, text and video and all that stuff. It’s incredible. It was an incredible aha moment and I for me something similar happened when I saw ChatGPT for the first time. It’s uncanny how the responses are really. If you haven’t tried it, I would recommend it.

[01:03:54] Andreas Lechner: Yeah, so sometimes there is more happening on the technology front. They spend more time on that and sometimes there is not much happening. Sometimes there’s more happening with your own companies so I don’t measure how much time I allocate, but I would say maybe roughly 2/3 towards existing companies.

Including developments that may potentially affect existing companies, so I’m no more an investor in Alphabet, but I was so judge, but he would certainly be an even bigger allocation of my time if I still was invested.

[01:04:30] Rob Vinall: Okay.

Questions about Management and Reputation risk

[01:04:34] Speaker 15: Thanks Rob for all the interesting talks, just a question about management and reputation risk. Your 15% objective return. Do you think there’s part of that comes from being willing to take on bets on companies like Credit Acceptance, or in this case matter where the market is very against? You know these people are doing bad things and you have a different assessment of the market in terms of what they do to generate value for their clients and there’s an arbitrage. Should we say in terms of that the results of the work that the company does versus what the market thinks that they’re doing? I don’t think there’s any company that has such a bad reputation as Meta Facebook, amongst any commentator, that they’re evil and they’re doing terrible things and yet the company makes money.

[01:05:24] Rob Vinall: Yeah, I mean just to be very clear. It’s not like I wouldn’t invest in a tobacco company on the basis that hey, a lot of people are going to get killed, but we’re going to make a lot of money so you know. If I’m taking a position in Meta where clearly there’s a lot of negative press about the company, it’s because I think I disagree with that. You know, I disagree very strongly with Meta we talked about in prior years, but I think there’s a tendency when the Internet does lots of good by connecting people together. Us all being here today as an example of that.

When good things happen it tends to be because of the Internet or people and all that stuff. And then when the bad stuff happens, then it’s sort of Meta, as tends to be the one that gets the blame for that. And you know, I think you have to accept that it’s a trade-off, right? By connecting people at scale, a lot of good happens. Much, much more good then than bad but there is also, unfortunately, some bad. But everything in life is a trade-off and the people who just sort of point to the bad, ignore the good. It doesn’t even acknowledge the trade-off that if you wanted to get rid of the bad, you would have to also get rid of the good. I think they make life very easy for themselves.

And you know, I think you have to accept that it’s a trade-off, right? By connecting people at scale, a lot of good happens. Much, much more good then than bad but there is also, unfortunately, some bad. But everything in life is a trade-off and the people who just sort of point to the bad, ignore the good. It doesn’t even acknowledge the trade-off that if you wanted to get rid of the bad, you would have to also get rid of the good. I think they make life very easy for themselves.

But the acid test is I think a company which genuinely does bad things would disappear over time. One way or another it would disappear, and it would turn out to be a very bad investment to the extent a company is perceived as doing bad things, but actually is a net positive for society. You’d expect that company over time to prosper.

[01:07:08] Andreas Lechner: And I also say some of the things that… I mean, we live in a very politically divided time, so one party says you should censor more, and the other says you should censor less and there are no clear rules and how much Meta should censor their platforms. So they have to find some compromise and, but they cannot make everyone happy. So if they censor something the one party will say, you censor too much and you’re a bad guy. And if they don’t censor something else then the other party will scream. And you cannot make it right for everyone. So I would wish for there are being clear rules. But they aren’t.

[01:07:54] Rob Vinall: Yeah, and it’s not by coincidence there aren’t because politicians are much happier to put the blame onto Mark Zuckerberg to the extent someone did lay down the clear rules, then that blame would then be shifted onto them. And so that’s why probably we’re just going to have to learn to live with the situation as it is.

Overlap between two portfolios

[01:08:15] Speaker 16: I would like to ask what is the overlap between your two portfolios. And if you are challenging also performance between you. What is the overlap in your position?

[01:08:27] Andreas Lechner: There are two companies currently overlapping. One is Meta and the other is Salesforce.

[01:08:34] Speaker 16: And what is your performance compared to RV capital?

[01:08:39] Rob Vinall: His way is better. I’ve had to work for a living. He compounded his capital just by managing his capital, so there’s no competition there, I’m afraid.

[01:08:46] Andreas Lechner: It’s not that much better. I mean, I’m also down a lot last year. Yeah, not, not quite 50 but maybe 30% in years.

Questions about ChatGPT and the impact on Wix

[01:09:03] Speaker 17: I have a question regarding ChatGPT because I also spend a substantial amount of time checking out and I was wondering in the end, in the next couple of years knowledge work will tend towards the processing power needed to produce the output and what socio-economic impact will that have on society making a large part of the population useless in terms of work as we know today? And the second question is maybe related to Wix because I had ChatGPT for example generate HTML and PHP code in a matter of seconds. Do you think that would, for example, strongly impact the business of Wix where I can just talk to ChatGPT and have it create a website with content within minutes or seconds?

[01:09:49] Rob Vinall: I read I read a wonderful book on a little bit on this, related to your question, I forget what the name was, but it’s about the use of energy since the very start of civilization, and if you think about us as a human race, we started as hunter-gatherers and we spent the day trying to find seeds and plants or whatever and expending all our energy on that and then various developments came along so they man or people managed to sort of harness animals and then having harnessed animals, someone invented a harness and then they improved on the harness.

So as a species, we’ve sort of been getting more and more efficient, and if you fast forward today where I think probably less than 1% of GDP and in developed economies is spent on agriculture, the reason we’re so efficient is that we’ve managed to harness the energy and of course machines and all that other stuff to do the hard work for us. And that has been a huge net positive for society and will continue to be and GDP and all this other stuff is all part of that overall development. That being said, there are always people that get left behind when these sorts of technologies come along. If you worked in agriculture a hundred years ago, and then you know, tractors or whatever it was coming along then you probably lost your job and to the extent, you didn’t know anything else then that probably would have worked well for you. So as a society, our job is to make sure people who don’t benefit from these changes get properly looked after us or retrained ideally or given a safety net if not, but it would be a huge mistake to try and slow down these things that make us more productive because that’s ultimately the driver which increases the overall pot and makes us as a species more wealthy, even though that’s not always fairly divided.

[01:11:58] Andreas Lechner: I think innovations like ChatGPT just increase productivity and make us all do more work in less time. There is an old joke. Two people are standing at a construction site and watching an excavator take a hole in the ground and one person says to the other, while this excavator made 100 people with shovels unemployed, and the other says there is or 10,000 people with spoons. So yeah, you always had innovations that made people more productive. But still, the unemployment rate is not at 99% right now, but it’s pretty much where it always has been, with some fluctuations of course. And I think the same way of ChatGPT it’s not like it can already replace a human, maybe in a few years I don’t know, but the human will have to move on to other things that ChatGPT is not as good as.

Why Andreas doesn’t like China

[01:13:00] Teddy: Maybe a bit unfair question, but I’m interested in your different views on China, so maybe Andreas, why don’t you like China and maybe Rob, where do you disagree?

[01:13:12] Rob Vinall: Well, I think you all know I’m very positive about this. I’ll let Andreas give you the other side of the coin.

[01:13:17] Andreas Lechner: Okay, I’ve had one investment in Australia which was a company that was developing a gas field in China, and you could easily calculate that the company was deeply undervalued, maybe worth 10 times as much as it was trading on the stock market. And I came out with a significant profit out of this investment, but it could have gone a completely different way because as I learned later, they have heard contracts with state-owned enterprises through which they sell their gas to the end customer. And whenever the economics turned out to be better than the state-owned company wished for, they shut off the cash flow to the dam and forced them to the negotiating table and renegotiated the contract and that happened nine times in 10 years.

So as an investor, you cannot just look at the contracts in place and the gas in the ground and things like that. So you would act in Western society but the whole political element plays a huge role. And I just find it introduces too much complexity to my investing life. I have 10,000 public investments in public companies in the US and 5000 in Europe. And if there is nothing within these 15,000 companies, then maybe I’m better off waiting half a year for something to come up rather than going too far out of my circle of competence to look for things.

[01:14:56] Rob Vinall: Yeah, I mean I wouldn’t disagree with any of that. From my perspective, I don’t think China is well-understood. In the West, people are generally negative about it. Perhaps in some parts for good reasons, because they have a different system, but that’s a system that works very well for the people there. I think that doesn’t get reported on as much and the people as a whole are pretty supportive of it. it’s a very different civilization with a very different history. And it’s quite difficult to compare it to the West. And when I look over there I see some, some an economy as a whole, which is developing very rapidly and within that economy, companies which are developing very rapidly and the political risk is much higher there than it is in the West, but I would argue so is the opportunity, not just in terms of the earnings development, but also in terms of the price you pay for those. And so for me, that risk-return matrix makes sense, but everyone will reach their conclusion about that.

Questions about Salesforce’s leadership shake-up

[01:16:08] Nate: Few questions from the Internet on Salesforce for both of you. In summary, how do you feel about the leadership shake-up and what’s your outlook for the company?

[01:16:18] Andreas Lechner: How do I feel about…?

[01:16:20] Nate: The leadership shake-up and then growth prospects going forward, outlook. Take it where you like.

[01:16:22] Andreas Lechner: Okay. Obviously, you want continuity in your leadership. It’s a huge disappointment if so, many people leave the company at the same time and they have to restructure. So from what I read about the situation, the takeover of Slack was not orchestrated as well as it should have been integrated. Also, the checks you made before the acquisition and in terms of the restructuring that was recently announced that let go of 10% of the people they just hired according to their revenue growth in the past, rather than incorporating the outlook of how revenues might develop going forward, so they’re just higher, too many people, unfortunately.

[01:17:24] Rob Vinall: Yeah, I mean it’s. I don’t think the development has been great from an operational standpoint over the last probably few years, but I think these things have a silver lining. Salesforce is a very well-financed company. It has zero financing issues. Its end product is software, which companies use to manage their customer relationships. It’s like a utility. There’s virtually impossible for them to tear it out. And so a crisis at a company like this is probably on balance a good thing. It’s a little bit painful to go through it as an investor, but clearly, they’re going to shape up. They’ve announced they’re going to cut headcount by 10%. That might not be the end of it. And just to be clear, I’m not a fan of headcount cutting in any respect. Ideally, companies shouldn’t over-hire the first place in this case, it’s in one of the wealthiest regions of the US, where people have lots of opportunities to do other things. So if they’re sitting around doing nothing, I have no problem with them being invited to go and do something else. Do you want to say something?

[01:18:33] Andreas Lechner: Yeah, I disagree a little bit that I think that Salesforce has done well operationally over the years. They just recently slowed down a bit because of the economy because of currency translation effects. Currency translation effects are probably now a thing of the past, and the economy will recover, and it’s just a normal thing that every few years we have a recession that every analyst should incorporate in his analysis. So I’m not disappointed by how things are developing in Salesforce. So I think I think certain mistakes have been made with Slack and that’s the only thing I wanted to express.

[01:19:15] Rob Vinall: Yeah, I agree with that and they were obviously losing discipline financially, and I think that’s probably in the past.

[01:19:28] Andreas Lechner: Yeah, I hope so. I mean, they communicate that they want to get the operating margin up and I think a high operating margin is not just something that can be derived from competitive advantages, but a management team also has to want it and has to make it a priority for them, otherwise, it won’t happen.

[01:19:52] Rob Vinall: Yeah, this week we’re in Copenhagen at another conference and we saw this company called Line Technologies. It’s a CRM company where the software is almost identical to well in terms of basic functionality identical to Salesforce. And the company had, what was it, so the company has about, like about €50 million in annual revenue. So probably about 1% of Salesforces and the operating margin was 30% or so.

[01:20:17] Andreas Lechner: So yeah, it was operating much more profitably. It’s true what you say. I mean maybe a little bit more than 50 million in revenues. Yeah, so less than 1%.

[01:20:27] Rob Vinall: A tiny, tiny company making margins that Salesforce could only dream of. So I think there’s going to be a lot of improvement there. I think in the coming years.

[01:20:38] Andreas Lechner: Absolutely. I also like the Salesforce verticalization strategy. I think this could lead to much higher margins.

[01:20:47] Rob Vinall: So Andreas, I warned you it would go by quicker than you think. At least that’s how I always experience it. It’s 11:55, so we probably got time depending on how quickly we answer one, maybe two questions. Should we do maybe one from the audience or one from Nate or what do you think? Two from the audience. Okay. So who has a mic?

Investment cases

[01:21:08] Speaker 18: Yeah, so one of the things I find interesting in your portfolio is I sort of see two kinds of investments on the one end, I see companies like investment cases like Google or Salesforce with the company is pretty good. They’ve done so many things right and you can distil the investment case into like a discipline. And then on the other hand, there are a lot of smaller companies where the mode is largely around, culture, and execution and it’s they’re working towards it. But these investment cases are messier. There are a lot more moving parts, like Ryman for example. So how do you think about, you know, it almost is sort of a different mental reflex to own both kinds of companies? So what do you think about that?

[01:21:52] Rob Vinall: So, just to summarise the question is like there’s some companies have very complex investment cases and others seem clearer cut or…?

[01:22:00] Speaker 18: Yeah, some to that effect.

[01:22:01] Rob Vinall: Not sure a hundred per cent I got the question. So feel free to chime in if I’m on the wrong track. I mean I try to make sure the investment cases are very simple. When I make the initial investment and I explained the cases in my letter. When I write a letter, I always imagine the person reading it is somewhat not an expert, but someone with a decent understanding, but the case should be sufficiently clear that a non-expert would approximately understand why the investment is being made, so it’s not the intention that the cases look to have too many moving parts or something. I think maybe what you’re referring to is some of the companies have over-invested in the boom years and are now sort of trying to work their way through that.

And so maybe that’s some of the noise you’re referring to. I didn’t foresee that at the outset hindsight, it was probably inevitable, but that was certainly not the reason to invest in them. But having now been invested in that situation, you make an assessment, and the price is obviously down a lot. Can they get through that and get back to where they were? In which case you would expect the share price to get back to where it was and then hopefully continue upwards from there. Or are problems unsolvable? If I think the problems are unsolvable, then most likely sell the company. But if I think it’s transitory, then I’d be willing to sit it down.

[01:23:28] Andreas Lechner: I agree, and I would say a short-term misalignment of revenues and costs is not affecting the mode of the business, so it’s important to make sure that the mode is intact and costs and revenues will align in the long term if the management is doing the right things. And in general, I prefer simple cases, it’s a much higher probability that the case will turn out in your favour if the case is simple.

[01:24:02] Rob Vinall: So it’s 11:58. So given that I had a little bit of a spiel at the beginning, we’re taking one last question here.

What is investable for a fund manager

[01:24:09] Speaker 19: I don’t think it’s controversial to say that over the past five years or so, the market at large has narrowed in favour of certain sectors and certain investment approaches. You mentioned earlier Rob, tobacco, but as a result of things like ESG, there are a number of other sectors that I would think of commodity sectors, mining, and energy that have fallen by the wayside not only in terms of investor favour but also capital coming into those industries. I often think of you as being a growth investor alongside an equality investor, and many of these industries will be growth investments going forward and we’re seeing that with some of the structural trends towards the need for copper for example. So what do you think about what is investable to you? Because certainly, I think a lot of institutional fund managers have taken great pride in calling some of these investments or these sectors as not something they typically do.

[01:25:11] Rob Vinall: Just to be clear. I’m not a big fan of a lot of this ESG stuff. I am a big fan of society having problems and we need to find solutions to those. But it strikes me a lot of the time that a lot of the ESG sort of ideas are heading on the wrong track. Speak specifically to commodities and oil-producing companies. I’m a big fan of commodities being produced, and oil being drilled. You know, I spoke earlier about social development and that’s only possible because we have the energy, we can harness to do this stuff for us so we don’t have to do it ourselves. And, I’ve never felt a strong affinity for oil companies. the big ones tend to be quite big and bureaucratic, and the smaller ones tend to be quite a few sorts of dodgy operators in there.

So I’ve just never felt a huge affinity, but philosophically I’m very open to investing in that space. Andreas mentioned he’s invested in a gas company before, so I’m very open to it and I wish there was a bit more joined-up thinking in the markets. I read an article the other day, which in the same newspaper article, I think was in the Guardian, complained about the rising oil prices. And then the strain that was putting on families and all that stuff at the same time as complaining about the amount of money oil companies are still spending on Capex. You could be anti-oil, but then you have to be in favour of the price going up a lot for what’s remaining or you could be pro-lowering the price and in which case in favour of drilling for more of it, but you can’t. You have to at least acknowledge those trade-offs and a lot of the ESG crowd, in my view, doesn’t acknowledge those trade-offs.

[01:27:08] Andreas Lechner: Well, when it comes to natural resources, typically these are very capital-intensive industries and I’m not super competent in them, so maybe you should know where your circle of competence is and then stick to it. It doesn’t mean that you cannot occasionally do something. That is borderline if the margin of safety is picking enough and concluded that this was big enough with the gas company seven years ago. But it is quite an unusual investment for me at the time, and typically I would not do it not because one shouldn’t do it, but because it’s not the right thing for me and for what I know.

[01:27:55] Rob Vinall: Great, so we’re a couple of minutes after the hour and the sun is shining here unexpectedly. I know a lot of you are keen to hit the mountains, which I would encourage you to do. Just to recap Andreas, we’re going to hang around here and talk a little bit longer, but after half an hour and 45 minutes or so, we’re going to both head up to the mountains. I’m more of a skier, so I’ll be orientating myself towards Nate and the powder hounds. Andreas is more of a walker, so he’ll be going for a walk and so feel free to tag along with Andreas. Congratulations to you for doing the first Q&A. It was wonderful.

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