Sam Hollanders (Chess Capital), why do you like Cake Box?

It was our pleasure to welcome Sam Hollanders of Chess Capital as a first-time guest on Good Investing Talks to discuss how he invests in Europe.

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We have discussed the following topics:

Introducing Sam Hollanders

[00:00:53] Tilman Versch: Dear viewers of Good Investing Talks, it’s great to have you back at the podcast and it’s great to welcome Sam Hollanders for the first time. Hi, Sam.

[00:01:01] Sam Hollander: Hi. Hi, Tilman. Great to be here.

[00:01:04] Tilman Versch: Sam, who are you?

[00:01:08] Sam Hollander: I’m pretty straightforward. I’m a family man. I have a wife and three lovely daughters, and I’m a value investor. So that’s the short version. I should elaborate on that. I didn’t start my career off as an investor but as an entrepreneur.

We owned photoshops with the family first, my father and then my sister, and I took over. I started investing because of some extra classes I took to have enough knowledge about management and there I had a professor who compared the Great Belgian company to one that went bankrupt due to fraud.

And when that when we made that comparison, I thought well, this is something I want to do. This is something I really like and that was in 1999. So just before the .com crisis and then in the .com crisis, my father lost a lot of money in the stock market. That’s when I decided to do all the investing myself. And then I started reading about Buffett, Munger, and Philip Fisher.

I tried to trend following and then other types of investing. But it really clicked for me when I read the little book That Beats the Market by Joe Greenblatt. I thought it was so easy to just buy good companies at great prices and have the sliding scale as well. So not only cheap companies and not only quality companies, but it is a sliding scale. What you pay is what really clicked for me.

Then in 2008, I made more money in the stock market than with the photoshops and that’s when I decided to go full-time in investing. In 2011, I started an investment newsletter. I wrote that for, I’m still writing by the way, but I wrote that for almost a decade until I decided I wanted to step up and start a fund.

And I wrote in the newsletter that I wanted to start a fund and I didn’t want to do it alone. So I wrote that half an hour later. My current partner Joel called me and said, well, let’s talk about this. I just sold my company and I don’t like how big banks invest. I want to have more skin in the game.

I wanted to invest like an entrepreneur and then we got together, met a few times and after three meetings we jumped. We started the fund and that was in 2020, just during full Corona. So that was not as easy as expected. And then last year we transferred from a compartment in a fund to our own structure in Luxembourg.

What does Chess Capital stand for?

[00:03:43] Tilman Versch: What does the fund that’s under the umbrella of Chess Capital stand for? Or what does Chess Capital stand for?

[00:03:51] Sam Hollander: Chess capital is value investing mostly small mid-Caps, family-owned is also pretty important for us. So not only family-owned with strategic ownership is a big focus. We do not invest in emerging markets, but we don’t like to limit ourselves regionally. So at the moment we are pretty heavily invested in the UK, and in Scandinavian countries, but we also.

[00:04:20] Tilman Versch: Also kind of emerging markets, sorry, it was too much money in some UK stocks.

[00:04:25] Sam Hollander: It’s the emerging market is a pretty tough market. Yeah, certainly since breakfast. But I think that’s where the opportunities lie now. So it’s easier there to find good opportunities, good companies that have really great prices at the moment.

So yeah, that’s just, yeah, emerging markets. Emerging markets, I mean Poland, if you see Poland, they have great companies as well, but the legal structure is still pretty different. So that’s one country we don’t invest in for example. So that’s what we call emerging.

[00:05:03] Tilman Versch: And why did you pick chess as an inspiration for your partnership?

[00:05:09] Sam Hollander: That’s double. My partner Joel was a pretty great chess player in his youth. He was in his, yeah, I don’t know his ranking, but he was pretty good. And he also had a nonprofit station that was called Go for Grandmaster and they were educating young people.

I think being ages of 12 to 16 they wanted to prove the first grandmaster in Belgium. So they did so I think about two years ago was finalised. So that’s the connection for him with chess. And my connection which just was in my investment newsletter. I needed a way to rank stocks because I used the sliding scale of Joe Green, but going from really almost net stocks to great quality company.

And I needed a way to rank them, so do really great companies are the queens and then all the way down to the pawns, the turn around stories that if they reach the end of the board, that can turn into queens. So and then the rogue and bishop are in between. So that was the connection for me. And then Joel and then it was just too easy to pick that name because investing is also kind of like a strategic game.

Starting out in the photoshop business

[00:06:26] Tilman Versch: Coming back to the family business, the photoshop business you did own. How did it help you to become better as an investor?

[00:06:36] Sam Hollander: I think we, look more at both Joel and I, we look at the business, we look at the managers, the culture of the business more I think than people just straight out of school. I think they look more at the numbers.

That is the feeling I have I don’t know because I didn’t come out of school this way, but its first stock is a business. And all the investors say that. That I think we have that more in our core than others because we were entrepreneurs first, as Buffett said, being an investor may be a better entrepreneur and being an entrepreneur, made me a better investor.

So I think that’s true. That applies to us as well. We weren’t formed with the efficient market hypothesis or anything else. We just look at the companies. It’s easy to keep a clear head that way.

[00:07:30] Tilman Versch: You were in the mess that’s called making a business where things blow up from time to time quite normal.

[00:07:38] Sam Hollander: Yeah, and for me, with the photoshops we had the digital uprising of the photos. So in the photo business, you didn’t earn anything selling equipment, it was ridiculous margins of 1 1/2 to 3%. We had big Dutch companies and big German companies entering our markets the margins were gone, but you earned on the printing of the photos.

So I learned that the disruption that can happen in businesses, I learned that early on and that you need to move that you need to be flexible. If you look at Microsoft, they almost had to reinvent themselves. They had their base Office, but they had to reinvent themselves to become the company they are today. Apple as well as computers.

They still have computers, but they’re the company they are now because of the iPhone. It’s also reinvention, and that’s something I learned early on as well. And for some reason, I don’t know why, but Azure well was also in telecom, so they specialised in equipment for hospitals.

But yeah, also there it’s the constant disruption, that’s why you won’t see us invest in, in high growth stocks or anything we because we learned the hard way sometimes that the disruption is fast and very easy to be there. So that’s also something we learned as entrepreneurs.

Why start a fund?

[00:09:05] Tilman Versch: Coming back to the fund, what is your why for starting a fund?

[00:09:11] Sam Hollander: That’s actually a pretty difficult question. For me, the moment I wrote it in the newsletter was a moment of frustration. I always have the sliding stocks of the real quality companies and then the funds that were there the nets, the turnarounds, the ones that easily go bankrupt and at some point I just received an e-mail from a reader that had invested way too much of his money in one of those riskier stocks, and not in the others, and he was mad at me because I suggested that stock, even it was for only 1% of the portfolio.

At that point, I was up that year about 18% and he lost money with the same stocks in his portfolio just because of the capital allocation.

So that was the frustration that I wrote off in the newsletter. And that was actually the start of the fund. The rest is poor, I think. When you have the funds and also the Boca roads, you are taken more seriously by other investors, so it’s easier to communicate with other investors and network. That’s also a big part for me.

That’s a nice thing to have as a fund investor, but yeah, and for Joel I know it was just his way. He didn’t want to have the standard investments of the big banks. He wanted to really act as an entrepreneur but still not do private equity. So that’s why we invest in sometimes pretty small companies, only €18 million a market cap.

And then you feel like you really can influence them. If you write them, you talked to the CFO, the CEO yourself, you don’t have investor relations in between and yeah, so the entrepreneurial aspect as well.

[00:11:19] Tilman Versch: So you had found a customer problem like first, you build a fan base with your newsletter. Then you found a customer problem and built the product to solve it. I think it’s called entrepreneurship.

[00:11:31] Sam Hollander: Yeah, it’s for me if I write about it and people don’t do what I write, that’s their choice. Of course, it’s their choice, their portfolio, they decide what they buy, and what they don’t buy.

But for me, it was this the problem that was solved was now I am responsible and I’m the sole responsible for the investment decisions, the allocation, the decisions. If something goes wrong and then the numbers are bad, which happened actually in 2022, it’s my fault and I can’t blame anyone else. So yeah.

Bringing value to the marketplace

[00:12:09] Tilman Versch: With your partnership, what kind of value do you want to bring to the marketplace, the marketplace of funds?

[00:12:20] Sam Hollander: I think the biggest thing we do is not different than anyone else because others are doing it as well but the most is communication with our partners. We send out a newsletter every quarter and we detail what stocks we bought, why we bought them, what stocks we sold and why we sold them.

So pretty straightforward communication that may be something I got from the newsletter writing before, but that’s something I think is really important. All our partners are entrepreneurs or have a really entrepreneurial mindset. And so they don’t have the time to do all the research and the investment, but they also like the that we are in those smaller companies, they can understand that they feel connected to. So I think that’s the differentiator for us mainly.

And then there’s our cost structure as well. We have zero management fee structure, only performance fees like the Buffett Partnerships 0/6/25 and I think that’s also saying it’s pretty fair to our partners. When they make money, they’ll be happy to pay us and if we don’t execute like we should, then we don’t get paid.

So that’s also think it’s different differentiator. There aren’t that many of us with zero management refunds.

[00:13:46] Tilman Versch: Why are you offering a fun solution that could be better than other offerings in the markets you’re competing with?

[00:13:55] Sam Hollander: Yeah. Better is such a difficult word. I don’t think maybe it’s better than others. It’s just it’s different. It’s us. And people who feel connected to us will like our fund more. As I said, it’s all entrepreneurs that are in our fund, so I think that’s the main differentiator and that’s I don’t want to call it better, it’s just different.

I think a lot of value investors are all doing the same thing one will focus on that stock and another one will focus on that stock and one year one will outperform the other compared to others because sometimes the market decides to keep your stocks low and then sometimes it decides that your stocks go up at different times.

I think value investing is, is maybe the factor that makes it better because I still believe that reversion to the mean is a still thing. We see a lot of passive investing and quality investing now. Growth investing was also with all the tech stocks. I believe it’s time now for a turnaround that the value will come. But yeah, I don’t think necessarily better, but just different.

I think people will understand if they read a partner letter for example on our website, then they will understand what we do, why we do it, and what motivates us. And I think that connection between us and the partners is what makes it better because I think our partners understand what we do and why we do it.

And they will keep participating even in periods when the fund isn’t performing as other, maybe other funds. So they won’t get out at the worst time at the bottom, and they don’t come in at the best time at the height. And that’s why I think it’s better because of the communication. Not necessarily investment-wise, I don’t think we can differentiate from others. It’s just a personal thing I think.

[00:16:02] Tilman Versch: Adding to this, what is your competitive advantage as a fund manager?

The competitive advantage

[00:16:07] Sam Hollander: To private investors or other fund managers? Because I think because it’s just the two of us against other funds, we have a very fast investment approach. I’m primarily focused on the research and then I discuss everything with Joel and then we decide what to buy that can be in one or two days.

Sometimes we just go that fast, sometimes it takes a few weeks, but we don’t have a committee that needs to decide. It’s just the two of us. So I think not that we trade that much. That isn’t the factor, but we can decide pretty fast.

And then also because we are small, we still have the opportunity to invest in those, those pretty small companies that others overlook. And because we, as I say, communicate a lot with our partners and actually even some have refused some investors because we didn’t think they have the right mindset.

We don’t have that quarterly or monthly target to hit. They’re okay with us. If we underperformed in 2022, they’re okay with that. They know why. And that’s the timing issue that a lot of fund managers have when they need to perform or compete against others.

We don’t feel that pressure and if we feel that pressure, it’s not coming from our limited partners, it’s coming from ourselves. So I think that’s also a very big competitive advantage that private investors also have, that’s why I asked the private or fund managers, private investors don’t need to perform against the benchmark each quarter as well and I don’t and we don’t compare ourselves to a benchmark either we have set ourselves a nominal goal of between 10 and 18% compared annual growth over a period of a decade.

And that’s the target we need to hit. So if the standard is poor or the euro, stocks do better or worse. Yeah, we don’t really care. We don’t compare ourselves.

Investment strategy

[00:18:22] Tilman Versch: You already mentioned it a bit, but what is the investment strategy of Chess Capital?

[00:18:28] Sam Hollander: We have three segments in our funds because we are in those pretty small stocks, the liquidity isn’t always that high. And to be able to meet redemptions or inflow of capital, sometimes not at the right time if the stock market was high.

Like in 2021, we had a big inflow of capital and then you need to place it somewhere. And if you don’t have good opportunities and that’s why we have a portion of about 20, 25% of the portfolio is in holding companies like XOR, Investor Base, or Sofina.

They provide the needed liquidity and they’re also just great companies and we were able to buy the method at that very opportune moment. So that was that’s a part of the portfolio.

Then we have the quality stocks, we call them our core positions. It’s for the moment it’s four of them. They are the biggest positions in our fund, they are between 5 and 8% of the fund. That’s the positions we always want to buy at a decent price.

We don’t overpay we don’t pay for growth that might be, as I said, the disruption is so inset in our brain that we are always pretty on the safe side with the margin of safety. But those core positions are quality businesses and then we have what we call the value place and those are leaning to quality, but they can also be just cheap.

For example, we bought unintelligible, the tanker company at around €6. Trading at half book value sold them when they reached 14. Didn’t go into the trading war. The same with the real estate in the retail Vedal Tower in Holland. It was trading at .25 times book value and book value was too high, but it was just ridiculous.

So we bought it at .25 and sold it at half book value. Those are the value places, but the value place ranges from that opportunity to also sometimes others may call a quality place or companies that grow at 6, 7, or 8% a year. But then we still buy them when they’re low. And those are the ones we sell when they reach intrinsic value. The fair value as opposed to the core positions.

The core positions will keep longer. We need to have a premium, maybe 30, 40% above what we calculate as intrinsic value because we don’t want to trade in and out of them a lot. A lot of the time with those really quality companies, you see that the stock market goes up. Those companies get overvalued, but if you sell them, you never get the new opportunity to buy in them and they increase their value from growing internally.

So you never buy them cheaper than when you sell them. So that’s the duality in our portfolio. So maybe you could call it the new Buffett after Charlie Munger and the old Buffett before Charlie Munger, we use the two approaches.

Investments that Sam is passionate about

[00:21:58] Tilman Versch: So what kind of investments make you really passionate? So maybe you can go back in time, and remember one or two situations where you’ve been really passionate about investment and could not stop thinking about it and even went to your wife or to kids to tell them about how you found this…

[00:22:20] Sam Hollander: Well, the ones I always tell the kids about are the but that’s a private investment that’s actually not in the fund because it’s even too small for the fund. It’s a small real estate company in Belgium.

And when I, I have three daughters. So there’s a lot of shopping and when we go to not the shopping malls but the high streets. Streets in the cities and we passed one of those buildings that they own, I always tell them that we own a piece of that, we own a piece of that, and that’s something that I think is a very nice thing to do with your kids because then they realise, first of all, what I do, because otherwise when they were younger, they always thought I was playing games on the computer instead of reading and investing.

So that helped. And yeah, that’s something I’m passionate about as well, real estate investing. That’s something I got from my father. But then company-wise, well one of the investments is in the photo business smart photo that one is I followed for a very long time and that’s just because we saw it, it almost went bankrupt and reinvented itself to go into personalised gifts instead of photos and then and grow again.

That’s also the one I discussed a lot with the family because when we ordered gifts like those coffee mugs with the photos on. I think they’re great to have them here for my family comes, friends and family, have their own mugs here with their own pictures on them, so that’s a fun thing.

Then the one that I am passionate about because I think the world misunderstands it is, is also a very local company, it’s 10 miles from where I live, the headquarters. That’s CPF. It’s a palm oil company, so I think palm oil is misunderstood.

Everyone sees it as the business that drove out the orangutans and then other monkeys and others always the bad part, cutting the forests. What people don’t see is that palm oil is much more efficient than soy, flour, or anything else. So if we want to feed the whole world, we need to invest in palm oil and do it the right way, of course. CPF is a company that does it the right way. Locally engaging with the community, building Schools for the community. So yeah, that’s something I’m passionate about as well because I think it’s really misunderstood. I’m thinking of others in the past, the holding companies I think as well, but that’s more not for the fun, but for private investors.

I think a lot of private investors are now looking at passive investing and ETF investing.

And I think if you look at the holding companies like Investor Abbey, XR and Ackermans, Fanara and in Belgium if you put your money next to all those rich families having the money to have the best employees for research and everything, I think it’s very difficult to go wrong with that. So that’s also one of my passions.

That’s also why they’re in the funds for a small part, the holdings, they provide liquidity, but you also see that they just perform well. And then most recently it’s Cake Box. It’s also a company, I think, that’s misunderstood they had accounting issues. And it wasn’t really accounting issues. Everyone thinks it’s accounting issues. It’s just the founder and the CFO, the Co-founders, they started with one Cake Box shop, it’s egg-free cake. There of the inner community, but even, not all Hindus, it’s even a small part of the Hindu community they don’t eat eggs. OK.

The most “boring” investment framework

[00:26:26] Tilman Versch: Let’s talk about this a bit later. I have to stop your passion for a second because we want to go deeper into Cake Box a bit later and maybe let’s try to invert it. What is the most boring investment framework scheme you have in the fund that works and we don’t have that much passion about it but like think, it’s just the helpful thing that works for you?

[00:26:53] Sam Hollander: Well, I always research the companies and then they always have to have to have to have something that I like because I think the most boring is if, for now, the construction companies. I think with rents, with inflation and I don’t mean rents. Oh wow, I’m looking for the word.

And yeah, interest rates, that’s it. With interest rates going up, yeah, sometimes I space out in English. I don’t know why. But the interest rate is going up. You see that construction companies are hit very hard. You have construction companies that now have at half book value or even 30% of book value. And if you see that there are still difficulties in housing in Germany, I know that there’s not sufficient housing or decent housing in the UK as well as and Sweden. Yeah. And we bought 3 different construction companies, one in Belgium, one in the UK, and one in Sweden.

The one in the UK is the most solid one. The land bank is just there. If they don’t develop now because people can’t afford it, then they develop in maybe two, three years, four years, five years. Yeah, we actually don’t care.

It’s just now it’s a waiting game. You bought them at such discounts that you just have to wait until either interest rates come down or people can afford better housing again. But the trouble is we have old housing that needs to be remodelled, and old neighbourhoods that need to be remodelled as well. You see them in the UK pretty much.

All housing blocks that just bought up and redeveloped with new schools, with new shops. Yeah, that’s. Something. Yeah, that’s maybe the most boring part, because once you bought them, it’s just, yeah, now we have to wait. And that’s something you can’t control in interest rates. So yeah.

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Reasons not to invest

[00:29:40] Tilman Versch: What are the reasons why you don’t invest? We talked a lot about like the positive factors. What if you get to know a company, what makes you pass?

[00:29:51] Sam Hollander: If you don’t understand it, that’s always the easiest answer. For example, banks. I think banks are very difficult to analyse, what’s kept off book, what’s on book. So that’s something we pass on. For the rest, its high debt is also a no-go for us. As I said, we have the disruption ingrained in our minds.

So we know that companies that have a lot of debt can go bankrupt the company without debt. It’s very hard to go bankrupt. I still can but it’s very hard. So we want our companies to be flexible. And I think if you have too much debt, you can’t be flexible. And then I think the highest no-go for a company is the management. If you don’t like or trust the management. Yeah, I think that’s the most important factor. I can give an example If you want.

A very big example. I never invested in Tesla because of Elon Musk. I think what he did with the $420 he set. We have a buyer for $420 and there wasn’t a buyer. And then he raised capital. When the stock price went higher. I think that was such a non-trustworthy move that I didn’t ever look at Tesla again as a company that could be bought. Yeah, that’s maybe the highest-profile one.

So even if it becomes to be the best car manufacturer in the world, you won’t see me buying it. I don’t feel like I can trust him.

Turning an idea into an investment

[00:31:37] Tilman Versch: What happens before you turn an idea into an investment, or what usually happens?

[00:31:44] Sam Hollander: If I read something about a company I like. I have different ways of finding companies. One is reading a lot. Of course, that’s for all investors then seeing what other investors do as well, they have great new ideas. Let’s look into them and then the others are screening just the real basic screening, putting factors in.

And then when the company comes out, the first thing I look at is the balance sheet. So as I said, debt is a pretty high factor for us. I also think you can see in the balance sheet a lot more than people think. If you see a growth in book value or tangible book value, you know the company is earning money.

And you know that it doesn’t matter. It’s reinvesting the money as well. You don’t have to look at the profit and loss statement to see that the company is making money. So the balance sheet is first for me. I like companies, industrial companies, and companies with assets. Something you can fall back on if needed to be after that.

It’s of course the profit and loss and the cash flow statement. And if I like the numbers, then I look into the management, what have they done are their strategic owners and so on. But I already know what the business does because it has to get me interested.

So yeah, maybe first: what does the business do, how does it make money, then the balance sheet, profit and loss statement, cash flows and then management and company culture as well. I think if we have such a luxury position these days that we don’t have to leave our homes to get to know the company culture you can find online. There are websites that rank companies, and disgruntled employees, that put things online. You can learn a lot about the company just from behind your computer.

[00:33:45] Tilman Versch: What is the aspect you spend the most time on in your research process?

[00:33:51] Sam Hollander: It’s the business itself. What does it do? How does it make money? Who are the competitors? Why is this company better or worse than its competitors? Where can it maybe do better? Maybe it’s an easy fix. And if it’s raining very low, then a lot of companies if you’re really on that side of the aspect, the value place the real deep net then you know that there’s something wrong with the company.

Is this something you can see that’s easily fixable that the management can fix? So that’s the business itself. That’s the first part, and then after that, a good hard look at the numbers trying to look for the so-called red flags. If is there something wrong with the numbers. Are they manipulating earnings figures?

Maybe a simple example of something that I don’t like is if you see a company reporting numbers and in the past when they were growing, they were always reporting 9% growth, 10% growth and at some point the numbers aren’t that great and they just mentioned the number of the revenue and no longer the rate at the growth or decline, that’s something I think then they’re hiding something.

That’s something I don’t like to see in company presentations. I like to be the management to be straightforward and say that, well, it is not as good as last year that’s why. If they made mistakes, want them to earn those mistakes and say why. So that’s the second part, the annual report. Reading the first one of last year and then some past years as well, not starting backwards. But sometimes just going five years back and seeing what they said then, what was they thinking of growth back then, did they execute it, did they, if not, did they come back to it in the next year and give us the reason why they didn’t execute. Yeah. That’s I think that’s the biggest part, the annual report itself.

What has changed in the past 5 years?

[00:36:11] Tilman Versch: You mentioned five years, going back five years and comparing it to now. What kind of research aspect do you now spend way more time than before?

[00:36:24] Sam Hollander: Than five years ago. Maybe I think the management. Because the folks are a bit more on the smaller companies and family-owned companies and if you are in the family-owned companies and they own sometimes 50, 51% well they decide everything as a small investor even as a fund you will own maybe 1% of the company.

And you have to realise you don’t have anything to say. You can make suggestions, but you don’t have any influence. So focusing on who they are is bigger than five years ago, five years ago was maybe more a quantitative approach, maybe more than numbers, so it’s more from numbers to people switch, but it’s not that big a difference. But yeah, maybe just a bit more.

What does Cake Box Holdings PLC do?

[00:37:23] Tilman Versch: So let’s go from people to cake. I promise to talk a bit more about Cake Box and one of your larger holdings and what kind of problems is Cake Box solving as a business.

[00:37:39] Sam Hollander: As I said they produce egg-free cake. So that’s their differentiator. There’s only one other company in the UK doing the same thing. A copy almost. It’s almost it’s copy. It’s even using the same colours for their shops.

They started off as Hindus. A small part of the Hindus can’t eat eggs because of their religion and that’s why they started the Cake Box shops. They started the shop themselves and then the CEO and the CFO both had one. And then after it became a franchise. But they yeah, it’s just the egg-free cake. They find a way to still have good-tasting cakes. I’m calling it good because when in Europe the Cake Box wouldn’t work in, I don’t know, Germanys, Germany’s cakes or…

[00:38:41] Tilman Versch: We have a lot of bakeries, so it’s hard to…

[00:38:42] Sam Hollander: Yeah. So I think it’s pretty good as well. That’s what I remember from the holidays. But in Belgium, in France, Cake Box wouldn’t work. It just isn’t tasty enough. But in the UK, the standards are different. They yeah, they have maybe a different taste palette. I don’t know.

We tried the cakes and they’re OK, but they’re not as good as we are used to. I’ll say it like that. Maybe that’s better. But the egg0free cake is it was a real difficulty to make the sponge that it’s based on that was the hard part to make without. And they found a way to still make it and still have it tasty.

So that’s good for that part of the Hindu community. That’s how it started. But now also vegans are are coming to their shops as well. So yeah, that’s a real solution for them. And I think the way they do it is they bake the sponges in factories, three points in the UK. Those go to the shops and then the shops make all the fresh ingredients on them, the whipped cream and fruit and all those things. So they found a way to do it fresh as well.

[00:40:01] Tilman Versch: Where did you find Cake Box an interesting investment? And how do you want to make money with it?

[00:40:09] Sam Hollander: For now, the only money we make with it is the dividend. They have a pretty high dividend because it’s a franchise, they don’t need that money, much money to reinvest.

That’s the way we have made the money for now. But we hope to make an exit sometime when they’re valued at the correct price. We think it’s undervalued now and the reason they’re undervalued is because they had, yeah, not accounting issues, but they grew too fast. As I said the CEO and the CFO at that time were both founders of the Cake Box shops. Especially the CEO is a real commercial guy.

He wants to grow. He’s a real entrepreneur and they lost track of what was needed to have a listed company. At some point, they just copied the old annual report and partially put in the new numbers and forgot to erase the lines of the old company reports so that the numbers didn’t add up. The RNS numbers, the one they fell at on the Stock Exchange, were correct, but the annual report was.

Yeah, a lot of people got scared back then because there was a pastry shop in England as well that went bankrupt due to fraud. So they saw the same thing happening again, which wasn’t it, just it grew too fast. They couldn’t cope. They didn’t have the control structures in place the demands weren’t sufficient enough.

The CFO got fired over it. So that’s now there was an interim CFO. Now there’s a new CFO who has experience in franchise businesses. So the structure is now solid enough.

And they’re still making a lot of cash. Yeah. They’re like, it’s just a cash machine. So for now, it’s still the dividend. I think it’s a 5 or 6% dividend yield. But yeah, let’s hope for an exit. Last summer, River Capital wanted to buy Cake Box.

River Capital is an Australian mostly private equity. They’ll also have a small part listed, and they also own, I think it’s a Cheesecake Factory, it’s called in Australia. And then yeah, they want to buy a Cake box at £1.60. Management refused and what we see now is that River Capital is buying even at a price higher than the £1.60 they offered before.

So I think maybe a new offer could be coming, that’s maybe a way as well to get some get paid. I hope it’s not too soon, because for now, they’re at 215 shops, Cake Box. They say they can grow to 400. So I would like to have some of that growth as well before they exit the stock market. I think that that’s at these prices, that’s not a problem for Cake Box, but it’s almost all UK-listed stocks of smaller companies. They’re so cheap that they’re going to be taken private, I think.

How to be sure Cake Box Holdings PLC is not a fraud

[00:43:25] Tilman Versch: How do you make sure that it’s not a fraud?

[00:43:28] Sam Hollander: You can never be 100% sure. We all remember Enron wildcards there even if big audit firms go over it, we’re never 100% sure. But we could visit the shop. We saw that those franchisees were so enthusiastic that they called it life-changing to be a franchisee.

They were very happy to be there and then they said they were. Yeah, almost like a family during Corona was a difficult time. They helped each other. They could count on headquarters. So I think that’s important. And then just small tests. Cake Box has franchisees who have shops and then they also have kiosks in supermarkets.

And if you went online, you saw that there were always good reviews about the shops, and then the kiosks got bad food reviews because the cakes weren’t refreshed enough. I’m going to say some.

I don’t know the exact hours, but let’s say they put in the cakes at 11:00 and then if you cut in the next day at 9:00 or 10:00, you had the old cakes, they weren’t taken out fast enough. So they were still. And then up past 11:00, there were new.

When I saw those reviews, I messaged the company and said well, there’s a problem there. You need to fix that because you’re getting bad reviews even for your franchisees, for the kiosks because people say Cake Boxes, Cake Boxes, they don’t care which franchise here or if it’s kiosk. And you get a response, you get a brief fast response and you see them acting on it. The kiosks were better managed after that just by us as a small phone sending mail to them. So that’s if you get a reaction and you get an immediate reaction and a detailed reaction. Most of the time it’s not a fraud.

If it’s a fraud. And I’m sad to say I have experienced fraud in my past with private equity. There are triggers in the way they say things the way they keep it more vague they don’t go into detail or if they give details then it’s strange details wanting to overthrow your thinking. So that’s yeah, maybe through experience.

You’re never too 100% sure, but I hope that through that experience. I learned enough to see when it’s a red flag or not, and usually, you can find it in the numbers as well as in the annual reports. And now with the accounting issues, indeed you could say how can you be sure. The way they reacted to it and the numbers in the RNS report were correct. So if you had Capital IQ or Bloomberg Terminal, you wouldn’t even have noticed if you didn’t read the annual report as well because the numbers were correct there, but not just the layout. The thing they give to the public was just made up wrong.

[00:46:48] Tilman Versch: Don’t let the intern do your annual report. It’s not a good idea.

[00:46:53] Sam Hollander: Yeah, I don’t know if it was the intern. He was also going through a divorce at the time the CFO back then. And I think it was just too much and maybe not having the structure of interns and subordinates to do the job as well, just growing, growing too fast.

[00:47:16] Tilman Versch: What could you have gotten potentially wrong in this investment?

[00:47:24] Sam Hollander: I think that if there’s something wrong, then it’s the growth. If they don’t manage to get from those 215 to 400 shops, then they’re worth less than we think. But still, we have enough margin of safety to still earn to still earn enough. Then it’s not, yeah, maybe a double from this bit less than a double, then maybe just a 30 or 40% undervalued.

I think that’s the biggest assumption we could have from its growth. They don’t manage to keep growing and what we don’t want to see is them entering other countries. As I said, I don’t think the cakes are good enough to enter Europe, so if they want to enter Europe, I think a lot of money will be lost in trying to gain market share.

They will eventually have to abandon or step up their game, but I don’t think so. I don’t see anyone in my neighbourhoods or in my family eating those cakes when we have a bakery next to it that has the cakes we are used to, maybe it’s just that we’re used to, but it doesn’t match our taste.

Sam Hollanders’ Exit Strategy

[00:48:46] Tilman Versch: How do you think about the exit at this investment?

[00:48:50] Sam Hollander: For now, we just want to see it grow and if they reach fair value at a point where the growth is progressed far enough, let’s say 300 or 350 franchisees, I think we will exit because over that we that the growth isn’t dominant anymore for now it’s growing and we don’t think of the next exit yet.

If the price keeps it at this point, I think we will be forced to exit because of her private equity taking it public, not private, sorry. So it’s not a real concern for us at the moment, the exit.

Framework for portfolio construction

[00:49:41] Tilman Versch: Let’s move to the last part of the interview about portfolio construction. So what do you think about portfolio construction? What is your general framework there?

[00:49:53] Sam Hollander: Already mentioned earlier that we divided it into three parts. So the holding company is the capital buffer to see if we can do redemptions or just mark money when we say we don’t have enough ideas. And after that if it would be possible to have the whole portfolio, all quality companies at decent prices.

We don’t invest more than 10% in a company at purchase that’s the rule we set for ourselves. It’s not a legal rule in the structure we have. We can have 30% in one company. But we don’t want to invest that in the company. So the core positions we typically buy between 5 and 8% and then we just let them grow.

That’s maybe a lazy way of capital allocation. If the company performs well, we are not going to diminish the position, just to have money taken out. We will just let it grow and that way we think winners will take care of the capital allocation itself. If your bad companies diminish price they will get a lower percentage in your front and the ones that perform well get the higher percentage in funds just naturally so.

But they do make a distinction. The core holdings are between 5 and 8% in buying and in for the value place, it’s between 2 1/2 to 4% that we buy originally. But we have a value placed now that is almost 6% of the portfolio that grew from 2 1/2 to 6%.

So we don’t exit them as long as we think the fair value isn’t reached we see no need to diminish positions just because of getting some money off the table, as long as we think it’s undervalued, just let them grow. That’s a pretty maybe lazy way of capital allocation, but it has worked in the past, so I hope it will still work in the future.

[00:52:17] Tilman Versch: Are there any other factors you think about in portfolio constructions like the quality of the cash flows, the differentiation between the cash flows or…?

[00:52:26] Sam Hollander: We have about maybe 20 to 25 stocks in our portfolio. So it isn’t highly concentrated and it isn’t diversified that much. We just think that that’s the sweet spot we can manage.

So that’s something we also look at if we go above that number, we will sell another company if we think we have found a better one just to not have too many companies to worry about actually. So that’s also part of the construction of the portfolio. We don’t want to have five automobile manufacturers, they’re all pretty undervalued. Stellantis, BMW, Mercedes, I think people are exaggerating what’s coming to us.

Maybe some are not. I think the Chinese manufacturers will come. It will hurt profits, but I think Stellantis for example is pretty decent in anticipating. They took a small position in a Chinese manufacturer as well.

They will do the distribution outside of China for that manufacturer. When we bought it, it was more than a double. It’s one of those that often 2.5% to 6%. So I don’t think it’s a buy anymore but I don’t see that as a sale but we don’t want Stellantis and BMW, for example. We will choose one we don’t want that big exposure I said we had three construction companies as well.

But those three construction companies together make up 5 1/2% of the portfolio, so we see them as one position, not three, just three different companies, but mentally it’s one position for us. So that’s something we look at as well. So that is not all. Even if it’s cheap, the whole sector can be cheap. We don’t want to be too heavily weighted in that sector.

We want to be diversified enough and I think we can do that with 20, 24, 25 companies. So no more. And you won’t see us drop below 50 companies, for example. I think that even if it is the best company in the world, as I said we still have that mindset of disruption.

We don’t want one company hurting us that badly. If you are in a business and you can’t see the disruption coming then if you’re not in the business, you won’t see it coming as well. That’s something we’re really ingrained with. So that’s why we want the diversification.

Closing thoughts

[00:55:20] Tilman Versch: Starting with photoshop helps you here. We covered a lot of ground in this interview, Sam. So for the end, there’s always the chance to add anything we haven’t discussed or you want to go deeper into. So is there anything to add?

[00:55:22] Sam Hollander: Not, not really, just that I’m very looking forward to meeting you in real life in Omaha. So that’s it for the Good Investing Community, if you’re at home as well, I would be very happy to meet you up all. I think that’s one thing I’m most looking forward to this year. It’s my first time in Omaha. Sadly, I had it planned last year, couldn’t go because of a move. Mr. Charlie, but yeah.

Goodbye

[00:56:05] Tilman Versch: You will at least experience Warren and some of my bad jokes as well hopefully. Great. Happy to see you then in person in Omaha. Thank you very much to the audience for listening to the interview. And thanks for coming on, Sam.

[00:56:21] Sam Hollander: Thank you

[00:56:21] Tilman Versch: Bye-bye.

Disclaimer

[00:56:30] Tilman Versch: I really hope you enjoyed this conversation. If you did, please leave a like and a comment and subscribe to my channel. Traditionally, I want to close this conversation with the disclaimer, so here you can find the disclaimer. It says, and please do your own work. This is no recommendation what we are doing here is just a qualified talk that helps you, but it’s no recommendation. Please always do your own work. Thank you and hope to see you in the next episode. Bye-bye.