How to evaluate good management, Rob Vinall (RV Capital)?

I had the pleasure to interview Rob Vinall of RV Capital in February 2019. Here you can find the full interview. Below is the transcript.

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[00:08] Tilman Versch: Hello, Rob. Well, great you came back to my YouTube channel. I would like to ask you to introduce yourself to our audience again. Who are you?

[00:25] Rob Vinall : Yeah, so my name is Rob. So I’m originally from the UK, but I’ve been living in Switzerland now for just over 15 years. I first moved here to work with a local family office, but I think after about two years in 2006, I set up RV capital. To begin with, it was purely a sort of consultancy. I had the dream of running my own fund, but I face the chicken and egg problem that many of your viewers I’m sure will be familiar with that. Without capital, it’s difficult to start a fund, but without a fund, it’s difficult to attract capital. 

So for the first few years, I was consulting for different family offices, also a company I think.  And I had my sort of lucky break in 2008 where the red drop family very kindly supported me and started the business owner fund. So since 2008 by my sole occupation has been managing the fund.

[01:18] Tilman Versch: You are now running the fund for 10 years?

[01:20] Rob Vinall: That’s right, yeah. 

[01:23] Tilman Versch:Congratulations on the anniversary. 

[01:24] Rob Vinall: Thank you. I’d rather be 10 years younger. 

A typical year for Rob

[01:30] Tilman Versch: How does a typical investment year of you look like?

[01:33] Rob Vinall: Do you mean how I kind of spends the time or? Yeah, so I guess, in terms of how I spend my time; there’s a part of the activity or an important part of the activity, which is sort of desk-based; kind of reading, reading annual reports, primary information on companies, making notes. I keep a journal on all of the companies which I follow. 

I usually build a model, not so much to Tilman Versch the company, but more just to make sure they’ve understood the mechanics of the business; so that’s the kind of the desk-based side of the research; then the other side is I love to visit companies. I was saying it’s very important for the investment process. So once I get to a sudden point with the desk research, so I think an idea of sufficiently interesting, I’ll normally get on the train or an airplane to go and visit the company and, you know, kick the tires, and meet with the management and that kind of thing. 

Traveling

[02:38] Tilman Versch: You are also goin into foreign countries to explore them?

[02:41] Rob Vinall: Yeah, so I’m completely opportunistic about where a company is based; and if some investors have a certain geographic focus like on a particular country, or continent, or whatever. 

For me, I’m completely indifferent to where a company is. The sudden characteristics, I look for an investment, which we can talk about, but provided that they’re there. I’m indifferent, whether a company is based in Germany, in America, or in China, South Africa, whatever.

Growing his business

[03:08] Tilman Versch: You’ve grown your assets under management from 10 to 250 million with a great track record.

[03:18] Rob Vinall: Thank you. 

[03:20] Tilman Versch: It’s a very good track record and also inflow. How does this change in the amount of money you’re taking care of changed you – or not changed you? 

[03:30] Rob Vinall: Well, I think it hasn’t made a whole lot of difference so far. You know, there was, I’ve never really marketed the fund. I think when the funds started back in 2008, there were probably around seven investors.  And I would guess that on average every year probably roughly seven investors have joined the fund, and there hasn’t really been much difference in that. Maybe there was slightly less joining in the earlier years, slightly more today, but there’s never been a big rush. And even today there are probably less than a hundred investors, investing in the fund. 

So it started as a club and still today it is a club. And in terms of the capital, I think the vast amount; the majority of the capital has come, not from people investing new capital, but from the performance of the existing investments. So I think in my first full year, the fund started and got around seven or 8 million Euros and had 20 or 30% performance; 20% of 7 million is less than 2 million, whereas today based on 200 million if I have a 20% return,  that’s 40 million. So it makes quite a big difference to know the percentages are the same, so the capital has really come from the performance rather than from people.

And in terms of how I invest, I’ve always found my sweet spot to be companies which have a market cap of around, about somewhere between one, two, three billion. I don’t like it when companies are too small, because it means either they have a very short track record, or they have a long, very mediocre track record.  On the other hand, I’m not so keen if companies are two large. Oftentimes the opportunity for growth has gone to some extent, not in all cases, but oftentimes. So for me, the sweet spot has always been in the roundabout the 1 billion Euro market cap space. And with the amount of capital I managed today, there are no real restrictions. 

Does AUM growth limit you?

[05:39] Tilman Versch: Or there’s no limiting through the amount of capital coming? 

[05:42] Rob Vinall: Well, you know, the stock market is a kind of a pyramid with the largest companies at the top, and then the further down the pyramid you go, the more companies there are smaller. And so the more capital you have, obviously the more you move towards the apex of the pyramid, and the less opportunity there is but, I still find this there are plenty of opportunities for me. 

And one advantage of being a little bit bigger today is I have very close relationships with a lot of the managers, or companies that I’m invested in. And by being a bigger part of the capital base for them, my voice maybe has a little bit, a greater weight, and so I think that’s, that’s definitely an advantage. 

Dealing with mistakes

[06:23] Tilman Versch: How do you deal with mistakes? 

[06:26] Rob Vinall: Yeah, so I’ve always before the fun started, I learned investing not by working at a fund management company or for somebody else, but really by managing my own money. So it all started in the early 2000s when there was a big sort of dot com crash. And I started with a very simple but effective methodology of buying a lot of their really beaten up companies, which were trading below the net cash they had on their balance sheet. 

But since day one; because I was managing my own money, I was always trying to figure out on the one hand, how to avoid active mistakes, and then on the other hand, how to do even better next with future investments.  And that’s kind of natural, if it’s your own money, you know, you’re not reporting to anybody else. It’s fairly obvious and intuitive that you want to avoid mistakes and get better.

And so it’s always been a really big part of my methodology to make an investment based on a certain investment hypothesis; and then later to look back on that divestment and see how it did and where I can do better the next time. 

And then, of course, if I scoot forward to 2008, I started managing other people’s money alongside my own, but the structure remained the same, it’s just me doing it. And my mentality is also the same as when it was just my own money of trying to kind of figure out how to permanently get better. And, I think it’s quite easy to do that if you’re not in a big corporate structure where there are people jostling for position, maybe with the ambition to occupy you or your place or whatever. 

So I think the kind of the smaller setup that I have is much more conducive to open to learning from mistakes than maybe in a larger corporate setting. 

What is a mistake?

[08:25] Tilman Versch: What do you define as mistakes?

[08:28] Rob Vinall: So in the very early days, I made some very obvious mistakes of commission. So I bought some companies based on a very simplistic balance sheet analysis trading at a big discount to book value and a handful of those went bankrupt or went to zero. And that was simply because I had not really gone beyond as a balance sheet analysis in analyzing the companies. So obviously I was already keen to eliminate that type of mistake early on.  I think that I’ve achieved that to a certain extent, but the much more common type of mistake is actually missing out on good opportunities and mistakes of omission; and a lot of my focus over the last 10 years. 

And I talk about it a lot in my letter is figuring out, ‘Okay, what can I do differently in the future to get better results? 

Novo Nordisk & Baidu

[09:24] Tilman Versch: I will also link your letters below so that people can read about it. In your letters, you also said you had a deficit in the investment of some stocks like Novo Nordisk and Baidu. Can you maybe tell more about the deficits you saw and why you sold the stocks? 

[09:41] Rob Vinall: Yeah, so there were two investments which did reasonably well for me, but certainly didn’t live up to my full expectations. So my investment hypothesis, and of course, most of the time hypothesis is dev work. But the hypothesis when I make an investment is always, you know, this is a wonderful company, which is going to grow for a very long period of time. 

And by remaining an owner of the company I’m going to participate in that Tilman Versch creation, that’s always the hypothesis, but of course, things don’t always work out that way. 

And, in the case of Novo Nordisk, what I think I overlooked was that there was a too greater dependency on raising prices, through achieving growth, as opposed to helping people by selling more insulin; and that became clear to me over time and that was the reason that I sold that company. 

And, in the case of Baidu, which is the kind of the Google of China, it’s a search engine company. My whole hypothesis there as well as that in  Baidu at the time the Chinese internet was a little bit behind that the Western European internet could effectively replicate the success Google had in the rest of the world and China. 

And although Baidu still does reasonably well as a business today, it’s nothing; it’s a shadow of Google. It hasn’t achieved anything like what Google has achieved. And the reason for that is that its search results are not particularly good. And, in particular, they tend to be quite commercial. So for example, Baidu owns a food delivery platform where it used to own a food delivery platform. And so few such for food delivery on Baidu, you would find its own services, but not the other ones. And that might make sense in the short term; because obviously it generated traffic for its own service. To my mind, it doesn’t make sense in the long run because you have effectively a service that people don’t trust, and if they don’t trust it, they don’t go to it with the same frequency and automation that we would, for example, go to Google. 

And so when I, when I realized that the search quality was not as good as I would hope, and that’s when I basically made the decision to sell it.  

Chinese internet stocks

[12:09] Tilman Versch: Looking at the Chinese internet stocks, where do you see the most, the biggest quality in these stocks?

[12:16] Rob Vinall: The Chinese internet, that’s a fascinating place because it’s kind of going off in a very different direction to where the Western internet has gone; and there are two very dominant players: One is 10 cent, which has kind of has the dominant social network in China, which is called WeChat. But it goes far beyond, for example, Facebook is not just a social network, it has payment, it has all kinds of services which people can use through its app, so it’s a much more expensive company than Facebook is. And the other one is, of course, Alibaba, which is a kind of a mixture of Amazon and eBay; and it also has a very dominant payment service. So they’re the two kinds of very high, high-quality companies, I would say.

 And then in the second row, there are lots of kinds of niche companies covering certain verticals or service requirements, so there are a lot of interesting companies there.

The importance of management

[13:17] Tilman Versch: Thank you for your insight. And you also said that the acting people or the management became more and more important to you. Why is that? 

[13:25] Rob Vinall: So, yeah when you start out as an investor, obviously, you rightly place a lot of an emphasis on your analytical abilities. So you try and understand what a company does and analyse the various risks involved in all of the different parts of its activity, and then form an opinion on whether it’s a good investment based on that analysis. 

But what I realized over time was that although I do my best to be a diligent analyst, a lot of the stuff you don’t really see from the outside in a company. And what I kind of realized was where the companies where being run by people I liked and trust, I found the stuff I didn’t see was generally positive. And in the companies where it was being run by people who I didn’t trust or I thought weren’t particularly good people, a lot of the surprises were negative. And so I kind of drew the conclusion from that although it’s important to be a diligent and thorough analyst; by far the most important aspect of an investment to get right is trusting the people who are running the company, so that’s by far the most important factor that I look for when I’m analysing a company as a potential investment. 

Trustworthiness of management

[14:47] Tilman Versch: What makes them management good and trustable? 

[14:51] Rob Vinall: The vast majority of managers, it’s very difficult to say one way and another. So if you think about it as a sort of a bell curve or distribution, you have the vast majority in the middle of the bell curve, and it’s very difficult to say one way or another. Are they good? Are they bad? Are they honest? Are they dishonest? I just don’t know. I might have an opinion, but that opinion would most likely be as often wrong as right. And then you have kind of the two extremes of the bell curve. You have managers who are very obviously, dishonest, misaligned, unmotivated, and, of course, you want to avoid those, like the plague. 

And then the other end of the bell curve there are managers where it’s completely obvious that the company constitutes their life’s work. They have a passion for the business, it’s the center of their lives, and of course, it’s those guys that you really want to focus on and not get distracted too much by all the other stuff. 

Filtering managers

[15:57] Tilman Versch: So, what tools do you use to filter all these good managers and the people you trust? What kind of “psychology insights” do you maybe use? 

[16:07] Rob Vinall: Yeah, so I understand the question, but I think by far the most important factor is actually to really decide for yourself that this is the most important factor you’re looking for. If you decide this is the thing you look for an investment, then it completely changes your psychology about how you approach a company, how you approach an analysis, how you decide which companies to dive deeper on, and which not to. So I think by far, the most important thing is actually to decide for yourself really deeply that this is what you want to focus on.  And if you do that, I kind of think 90% of the hard work is actually done.

But then, of course, your question is, having decided this is what you want to focus on, what are the kinds of the factors to look for? And it’s kind of quite obvious stuff, so if you’re looking for a company where it constitutes the manager’s life’s work, then obviously that person, most likely has a very long period of time where they’ve worked in the company. They may very well be the founder or have started at the company at the very early stage of their career, so it’s kind of very obvious stuff like that. 

Grenke’s management

[17:22] Tilman Versch: You mentioned the positive surprises you have when you invest in companies with good management, and people you can trust. One of your investments is Grenke. Do you have it in your fund for like, from the beginning on?

[17:34] Rob Vinall: Yeah.

[17:35] Tilman Versch: Can you maybe tell a bit about the positive surprises you had there to give some more light on this? 

[17:40] Rob Vinall: Yeah, absolutely! So, I mean, there are a number of examples that occurred to me. So, Grenke is a German company, which does so called small ticket, IT leasing. So if a company wants to buy, say two or three laptops, maybe 5,000 euros, they have the choice of paying in cash, getting a bank loan, or doing a leasing contract in Grenke would be the company that they would hopefully go to if they decide to do a lease. 

And like all financial companies, Grenke was under a lot of pressure in the financial crisis back in 2008 and 2009. And whilst, some companies went under in that period, some companies trod water, and some companies became much more valuable. And, Grenke was definitely the case of a company that became much more valuable just to pick one example. 

In early 2009, they bought a bank out of bankruptcy, a small Hamburg-based bank, paid almost nothing for it, and that gave them the possibility to immediately gain the ability to take in deposits. And at the time they used a bank as well for various other things including making loans. And so that’s something that I certainly wouldn’t have predicted if you’d asked me if it was going to happen in 2007, but it’s the type of positive surprise that does happen when you align yourself with managers who are thinking from the perspective of an owner.

Other examples for good managers

[19:14] Tilman Versch: Are there any other good examples you can recommend to look at when and when is good? It could be also besides your fund investments.

[19:27] Rob Vinall: So an example of a characteristic, or an example of a manager?

[19:29] Tilman Versch: Of a manager. 

[19:31] Rob Vinall: Well, there are so many. I mean, I haven’t invested in Starbucks, but I think Howard Schultz is someone who clearly has an incredible passion for Starbucks; and then he has a deep love for the company. Love is not a word that you often find being used in financial circles, but that’s actually what you’re really looking for; and there, it’s kind of in a very obvious in him and there’s a ton of other examples as well. 

[19:58] Tilman Versch: For instance, like? Give examples. 

[20:00] Rob Vinall: Let me think.

[20:03] Tilman Versch: For sure. 

[20:11] Rob Vinall: I think I could almost mention any of my investments. I have invested in this company in Seattle called Trupanion, which does pet insurance. It was set up by, Darryl Rawlings many years ago. He’s still today, one of the largest shareholders, he runs the business, and it’s clearly the absolute center of his life. I mean, when you look for this you find quite a lot of it out there, yeah. 

Corporate culture

[20:40] Tilman Versch:Thank you for the example of the management. You were also talking about corporate or corporate culture. What’s the definition of this and what is a good corporate culture for you? 

[20:52] Rob Vinall: Yeah, so I think culture is incredibly important for companies. The way culture work is it kind of provides a kind of guideline or sort of an operating manual for employees of what they should do when it’s not clear what they should do. 

So, you know, for example, Amazon is a company where the customer service is really at the center of its culture. And so even if there’s a specific case where an employee doesn’t know what makes you do, they can always refer back to the company’s values and this culture; okay, what would be the most customer-friendly to do. And so it kind of provides them with guidelines on what to do.

 So culture is super important, you know, but where does culture come from? Culture ultimately comes from the values and the personality of the founder. And so that’s why, they’re kind of the leading people in a company and the culture, I kind of view as almost quite interchangeable. 

[21:54] Tilman Versch: Interesting, maybe to end our discussion, a bit comfortable question. 

[22:02] Rob Vinall: Yeah.

Management and culture of Facebook

[22:05] Tilman Versch: One of your holdings is Facebook where I have the gut feeling that I can’t trust management. There are a lot of stories about data privacy.

[22:15] Rob Vinall: Yeah.

[22:14] Tilman Versch: Things were they – in my eyes – lied. So, how do you see Facebook from the management perspective? 

[22:21] Rob Vinall: No, I mean so Facebook is one of my largest investments, so as you can imagine I kind of disagree with that. I think Mark Zuckerberg is one of the most sorts of purpose and mission-driven people I’ve ever come across.  If he’s made a mistake, it’s probably that he’s believed to dogmatically in his vision. 

The vision he had was of by connecting people, you would create this more open and better world. I guess that’s been the guiding principle of the company since the very beginning; and I think it was a mission that a lot of people would have agreed with a few years ago.

 So when you had the Arab spring and what appeared to be the case of some of the smaller people, being able to rise up against an oppressive regime through the tools of social media, people took a very kind of positive view on that openness; and connectedness. And then more recently over the last couple of years, kind of the bad guys, if you would have caught up. And they’ve also figured out ways to use that openness and connectedness to spread hate, to influence elections and that kind of thing; and that’s obviously a terrible thing. 

But I would argue very strongly think that’s been a result of people effectively exploiting the mission of the company. And the company was too slow to notice this was happening and it’s received criticism for that quite correctly. 

But I think that their heart is in the right place. And probably nobody would have guessed it would become such a large and powerful company in such a short space of time; and how people who believe very firmly in free speech would change their mind so quickly that certain types of speech should be actively censored and suppressed. 

So things have moved incredibly quickly. Society’s values have changed quite quickly, and the company has been sort of caught in the middle of that, but I don’t doubt for a minute that Mark Zuckerberg’s heart is kind of in the right place.

Reflexivity in his process

[24:36] Tilman Versch: In this case, to change the culture in a company you need reflectivity. How does reflexivity play a role in your process? 

[24:47] Rob Vinall: Yeah, I mean in this case, I think the culture or the values of the company do have to adapt. Right? Because people thought the more open and connected the world is the better of the place it’s going to be; and that belief has unfortunately been shown not to be a hundred percent correct. I think it is largely correct, but it’s not a hundred percent correct. And those minority of cases where that openness leads to crime, interference with election and stuff, that’s a price that society is not willing to pay for all the good stuff that’s happened. So, the company has to adapt to that and adapt its values more towards kind of safety and privacy in addition to kind of connectedness. So it definitely requires some change in and the company is doing that. 

I think we’re pretty lucky to have someone like Mark Zuckerberg who clearly is no longer financially motivated. He’s already sufficiently wealthy, that that can be ruled out. So he really, I think it’s trying to do the right thing. And we’re lucky it’s someone like that who’s in such a position, as opposed to someone with a very active political agenda, trying to abuse that position of power that they’re in. 

[26:04] Tilman Versch: Thank you very much for this open and thoughtful interview.

[26:07] Rob Vinall: Thank you.

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