Latest / The Dutch Investors / #39 | Quality investing, moats and valuation | Interview w/ Niklas from Heavy Moat Investments

Transcript

#39 | Quality investing, moats and valuation | Interview w/ Niklas from Heavy Moat Investments · The Dutch Investors

• 0:00
  SPEAKER_01: In today's episode we are joined by Nicholas from Heavy Mode Investments.
• 0:05
  SPEAKER_01: If you've been following his work over on Substack or Twitter, you'll know he's all about finding companies with deep durable modes, businesses that stand the test of time.
• 0:16
  SPEAKER_01: But Nicholas is not just about theory, he's been actively researching and investing in unique European companies from the likes of Frosta or And Sartorius Stadium, to more niche names like Pluxi and Edenred.
• 0:32
  SPEAKER_01: We dive into his investment philosophy, his process for identifying real quality, and the sectors he's excited about, but also the sectors he wants to avoid.
• 0:44
  SPEAKER_01: We will also talk about how to value these companies and when it's time to pull the trigger.
• 0:49
  SPEAKER_01: It was a fascinating conversation.
• 0:51
  SPEAKER_01: Enjoy today's chat with Nicholas from Heavy Mode Investments.
• 1:05
  SPEAKER_05: Could anyone do the same thing you did starting today?
• 1:10
  SPEAKER_02: Are you born with it?
• 1:11
  SPEAKER_02: Is it DNA?
• 1:12
  SPEAKER_02: Is it some early childhood exposure?
• 1:16
  SPEAKER_06: The first rule of an investment is don't lose.
• 1:19
  SPEAKER_06: And the second rule of investment is don't forget the first rule, and that's all the rules there are.
• 1:23
  SPEAKER_05: To give up what you're doing well because of guesses about what's going to happen just doesn't make any sense to us.
• 1:29
  SPEAKER_05: Mommy, we are going to be buyers of things over time.
• 1:32
  SPEAKER_03: What I needed to get ahead was to meet against idiots.
• 1:36
  SPEAKER_03: And luckily there's a large supply.
• 1:44
  SPEAKER_01: Once again, it's not unfamiliar territory for you anymore.
• 1:48
  SPEAKER_01: You've been on the podcast a couple of times now, analyzing French flavor and fragrance company Robert A with me, and recently Pluxi with Luc.
• 1:59
  SPEAKER_01: So welcome back.
• 2:00
  SPEAKER_01: Glad you took out the time to do this with us, especially on a beautiful sunny day as today.
• 2:07
  SPEAKER_00: Yeah, nice to be back here.
• 2:08
  SPEAKER_00: I did not expect to be back as soon, but but here we are.
• 2:13
  SPEAKER_00: Ready to talk about investing.
• 2:15
  SPEAKER_01: Yeah, maybe you'll become a regular.
• 2:17
  SPEAKER_01: We'll we'll we'll see how that uh turns out.
• 2:20
  SPEAKER_01: Before we talk about uh modes um investing, your investing strategy.
• 2:26
  SPEAKER_01: Most people probably know you by your substack name, uh Heavy Mode Investments or uh Stonk Metal from uh X or previously Twitter.
• 2:37
  SPEAKER_01: But perhaps we can start there.
• 2:40
  SPEAKER_01: So uh can you perhaps briefly introduce yourself to the audience?
• 2:44
  SPEAKER_01: Who is Nicholas, where you're from, and maybe share how heavy mode investments came to be?
• 2:51
  SPEAKER_01: Yeah, sure.
• 2:52
  SPEAKER_00: Uh I'm Nicholas, I'm from Southern Germany, and I I'm 26 years old.
• 2:58
  SPEAKER_00: I started investing in 2020, at least in stocks.
• 3:02
  SPEAKER_00: I did some other stuff before, but but nothing too serious and not much I talk about.
• 3:07
  SPEAKER_00: But I got into investing in stocks in 2020 with the whole market uncertainty and the corona crash, and basically it was uh from a university university lecture where I studied uh business informatics.
• 3:22
  SPEAKER_00: A friend of mine had a uh finance course, and um for me it was scheduled for the next semester, but we still talked about it, and they had a um like a demo portfolio where they had to to make a portfolio over the whole semester as a task, and we we started talking about stocks, and I I noticed how interesting it all is and how diverse it is.
• 3:46
  SPEAKER_00: You can basically learn for a decade and still only scratch the surface.
• 3:52
  SPEAKER_00: So ever since then I got a little addicted to the whole uh market understanding companies and investing my own money.
• 4:01
  SPEAKER_00: I started pretty much from the beginning to to document it all on Twitter.
• 4:06
  SPEAKER_00: And if you go all the way back, you still have some pretty amateurish uh takes from me, but I I think over the years I I learned a lot.
• 4:15
  SPEAKER_00: I went through a lot of different investing styles, especially in the beginning, trying to figure out what I wanted to do, and eventually got to my to my current um philosophy and also strategy.
• 4:28
  SPEAKER_00: Um in 2022 I got a message by Seeking Alpha if I wanted to write there, so that's what I had been doing for I think uh one and a half years, no, two years actually.
• 4:41
  SPEAKER_00: And in 2024, I went over to Stubstack and and started to publish myself.
• 4:47
  SPEAKER_01: Yeah, I I love what you said, where you said you can do this for decades and still keep learning and learn a lot.
• 4:55
  SPEAKER_01: It's uh it's like a never-ending journey of uh well professional and personal growth, uh, which we we love as well.
• 5:03
  SPEAKER_01: So what's interesting is that a lot of people spend years uh working on their skill set, working on ideas, reading, perhaps building frameworks, and they never really share any of it, which is fine, but you made the choice to put yourself out there in the world, uh, and I think that's worth exploring a bit because whether you're managing money or just thinking through ideas, writing publicly forces a level of responsibility, clarity.
• 5:39
  SPEAKER_01: You can get a lot of pushback, you get a lot of skeptics, which most people try to avoid.
• 5:45
  SPEAKER_01: So, what made you want to start sharing your research under this name?
• 5:50
  SPEAKER_01: And was there a moment where you just thought, well, you know what?
• 5:55
  SPEAKER_01: I I'll just go public with all of this.
• 5:58
  SPEAKER_00: Yeah, so from the beginning, I I wanted to journal what I'm doing.
• 6:02
  SPEAKER_00: Um, and if you just journal yourself in a I don't know, in a Word document or even written by hand, you still can make up your mind and try to trick yourself, yeah, this that the decision wasn't wrong, it just was unfortunate or whatever.
• 6:18
  SPEAKER_00: And I think like if you if you do it publicly, you have a a different level of transparency and also you have people who can take you accountable.
• 6:28
  SPEAKER_00: It doesn't mean that you have to owe them anything, but but it just makes the experience a lot more um more real, let's say.
• 6:37
  SPEAKER_00: You you you do um think about what you try to write more if you do it publicly.
• 6:45
  SPEAKER_00: And also, as you said, you get pushback sometimes.
• 6:48
  SPEAKER_00: And we can research as long as we want.
• 6:51
  SPEAKER_00: If we have some bias in our head and nobody challenges it, then we oftentimes can can run into mistakes, and doing it all publicly and getting pushback can can help therein.
• 7:03
  SPEAKER_00: And also having conversations makes you keep growing.
• 7:08
  SPEAKER_00: You figure out stuff you wouldn't have found otherwise, and yeah, it just makes experience better for for everybody.
• 7:16
  SPEAKER_00: In the end of the day, investing is a personal story, but we we don't need to go the way alone.
• 7:21
  SPEAKER_01: Uh yeah.
• 7:23
  SPEAKER_01: And then there is, of course, your uh your name, uh Heavy Mode Investments.
• 7:28
  SPEAKER_01: It's it's a good name, it's simple, it sticks, but it also says something about the way you think and the what and what you look for.
• 7:38
  SPEAKER_01: There are a lot of people who say they invest in mody businesses in quotation marks.
• 7:44
  SPEAKER_01: It's become kind of a buzzword, maybe, since Buffett threw it out there years ago.
• 7:50
  SPEAKER_01: But putting that word heavy right in the name suggests you're looking for something more than just a strong brand with good economics.
• 8:00
  SPEAKER_01: So where did where did the name come from and what does it mean to you?
• 8:05
  SPEAKER_00: Uh the name has two aspects.
• 8:07
  SPEAKER_00: Um the first one is the mode investments.
• 8:10
  SPEAKER_00: Um I think starting in in 2022 when I found roughly to my to my current philosophy, I started to look more into companies with with high competitive advantages.
• 8:23
  SPEAKER_00: Uh basically got there after reading uh 100 baggers, which goes a lot into the concept of uh long reinvest reinvestment runways and high-quality businesses, and just keeping keeping uh shares for the long term.
• 8:38
  SPEAKER_00: Uh previously I was mostly into growth investing with all the pandemic darlings thinking that you can only get high returns if you have high revenue growth.
• 8:48
  SPEAKER_00: I mean there's some truth behind it, but uh a lot of the hyper-growth companies slow down and uh often they are way too expensive.
• 8:57
  SPEAKER_00: And what I try to look for is consistent moderate growth for like 10 to 15% over the long term, and with a consistent and uh strongly competitively advantaged uh business.
• 9:13
  SPEAKER_00: And then the other part is the is the heavy, which is a reference to my love for heavy metal music and all kinds of extreme music.
• 9:22
  SPEAKER_00: So I tried to combine those two and it ended up sounding pretty good.
• 9:28
  SPEAKER_00: That's also how I made my logo with the with the metal fist uh and uh a chart going up.
• 9:36
  SPEAKER_00: So yeah, it's it's it's a combination between my investment philosophy and also my my personal uh hobby of listening to music.
• 9:45
  SPEAKER_01: If you didn't tell us that, I would have thought that it really was about finding like heavy modes in a company, white modes.
• 9:55
  SPEAKER_00: So uh I mean that that's also part of it.
• 9:58
  SPEAKER_00: Um I mean some people also um thought it meant uh looking into companies with a heavy mode in terms of capital intensive, which is something I tried for a bit in some investments, but it's not really my style.
• 10:13
  SPEAKER_00: But yeah, I I really like the the name.
• 10:16
  SPEAKER_00: I'm I'm very glad I changed to it a few years ago, and yeah.
• 10:21
  SPEAKER_01: You mentioned having tried many different investing styles.
• 10:24
  SPEAKER_01: I think you said that uh a few minutes ago.
• 10:27
  SPEAKER_01: What did you mean by that?
• 10:28
  SPEAKER_01: What did you discover during that period?
• 10:31
  SPEAKER_00: Yeah, so so starting off, I was a lot into uh like companies I knew, stuff like Coca-Cola, Colgate, Palma Leaf, and and all the the let's say boring dividend companies.
• 10:45
  SPEAKER_00: Then I got uh got influenced by the whole market hysteria in 2021 and bought fast-growing tech stocks like like uh like Square or Teledoc, Fiverr, and all the kind of unprofitable uh stocks that went up 500% and then crashed 90%.
• 11:08
  SPEAKER_00: Ended up losing some money uh and learned a lot from it.
• 11:14
  SPEAKER_00: And then after reading 100 baggers, as I said, I went more into quality investing, I would say.
• 11:20
  SPEAKER_00: And as time went on, I also put a heavier focus on value investing, because a lot of the typical quality uh investing crowd is concentrated on a lot of high-quality companies, but without a lot of regard to valuation.
• 11:37
  SPEAKER_00: And I mean, even the best company is not a great deal if it is trading at 50 times earnings and growing at 7% a year, looking at at stocks like like Sintas.
• 11:48
  SPEAKER_00: Uh, very good business.
• 11:50
  SPEAKER_00: I would love to own it at a right price, but that price is like 60% lower, probably.
• 11:55
  SPEAKER_01: I haven't done the evaluation in a while, but a lot of people I feel like just Yeah, it sounds it's it's a way for many investors to simplify investing to almost a single sentence in a way where you say I will buy high-quality companies, no matter the valuation, and hold them forever, and I agree that uh it doesn't work like that.
• 12:31
  SPEAKER_00: Yeah, I feel like people just take uh Buffett quotes and put them way too literally and um put their own spin on it.
• 12:39
  SPEAKER_00: And especially in in this uh instance, uh I feel like a lot of people quote Buffett saying he would rather buy a um great business at a fair price than a fair business at a great price.
• 12:53
  SPEAKER_00: But if Buffett says that he means like paying 20 PE instead of 15p and not paying 50p.
• 13:00
  SPEAKER_00: So yeah, I feel like uh Buffett is probably the person that gets misquoted the most in investing, and yeah, I'm not a big fan of that.
• 13:10
  SPEAKER_01: What is it about investing you like so much?
• 13:14
  SPEAKER_00: Uh I like the aspect that it's so uh so different wherever you look.
• 13:21
  SPEAKER_00: Uh I have a portfolio of 20 businesses, and most of them are very different.
• 13:26
  SPEAKER_00: They share some similarities, but they all have their unique, um unique um points.
• 13:34
  SPEAKER_00: And it's just a never-ending story of things you can discover, things you can learn about, and you also learn things about the real world.
• 13:44
  SPEAKER_00: Like knowing how businesses work, we interact with businesses all the time, you start to understand the world better, and it's just uh a very mentally stimulating uh part-time activity, I feel like.
• 14:02
  SPEAKER_01: Let's shift gears a little bit and talk about how you how you actually approach investing.
• 14:08
  SPEAKER_01: Not in the technical sense, we'll get to that, but more in terms of how you see the world as an investor.
• 14:14
  SPEAKER_01: Because everyone's got their own lens, right?
• 14:17
  SPEAKER_01: Some people are laser focused on, I don't know, the mode or valuation.
• 14:22
  SPEAKER_01: Others care more about the management team, people.
• 14:26
  SPEAKER_01: Um, some want momentum.
• 14:28
  SPEAKER_01: I can imagine you being from Germany also changes your view a little bit on investing compared to, say, an American investor or an Asian investor.
• 14:38
  SPEAKER_01: So let's start at the top.
• 14:41
  SPEAKER_01: How would you describe your investment philosophy?
• 14:46
  SPEAKER_01: What do you look for?
• 14:47
  SPEAKER_00: So, if I would have to put an umbrella term over it, I would say quality value investing.
• 14:53
  SPEAKER_00: And I try to focus on businesses with a large and growing competitive advantage, led by talented people, and that can allocate capital well, preferably by reinvesting back into the business and then returning all excess capital to shareholders.
• 15:09
  SPEAKER_00: That's like the ideal business, and um uh I try to own them for the long term, but what I noticed is that it often doesn't work out to own businesses for let's say buy them and own them for 10 years.
• 15:25
  SPEAKER_00: I have a lot of turnover, maybe too much, but I think that's fine.
• 15:30
  SPEAKER_00: I see it as buying a company, seeing if I like it, or I like owning it, and then um putting more money into it.
• 15:39
  SPEAKER_00: I also try to own businesses that add value to society and not just harm people or um just are not a net positive.
• 15:50
  SPEAKER_00: Uh I mean like for example, gambling companies in my opinion do not add anything to the world, they just take away.
• 15:58
  SPEAKER_00: And at the end of the day, I want to be an owner of these businesses.
• 16:02
  SPEAKER_00: I want to be along there for the long term and partner up with a management team.
• 16:08
  SPEAKER_00: So I must stand behind the business ethically.
• 16:11
  SPEAKER_00: So that's also a part that um that I tried to look at.
• 16:15
  SPEAKER_01: Yeah, one thing that's always interesting is how people develop a kind of gravitational pool towards certain types of companies.
• 16:23
  SPEAKER_01: You said you like or look for quality companies, um perhaps companies that add value to society or you stand behind ethically.
• 16:34
  SPEAKER_01: So, how do you define quality?
• 16:36
  SPEAKER_01: It's a word that gets thrown around a lot.
• 16:39
  SPEAKER_01: Uh, some people say it's consistent cash flow, uh, increasing returns on capital, pricing power, whatever it may be.
• 16:47
  SPEAKER_01: So, how do you define quality?
• 16:50
  SPEAKER_00: I I asked myself the same question a while ago, and I ended up developing a 30-category quality score where I look into management incentives, secular trends, financial strength, mode, growth, and earnings quality of the business.
• 17:08
  SPEAKER_00: So I look at uh some of the things that uh most people look at, like return on invested capital, but especially return on invested capital I feel like is um used too much and not in the right way.
• 17:22
  SPEAKER_00: Just having a high return on invested capital does not really help a lot.
• 17:27
  SPEAKER_00: You need reinvestment, and I feel like a lot of people can can get uh sucked into just looking at ROIC.
• 17:36
  SPEAKER_00: Um yeah, so for me, especially the capital efficiency part is um consisting of three parts.
• 17:45
  SPEAKER_00: ROIC needs to be high, we need to be efficient with with what money we invest, then we need to have a high reinvestment rate so that we actually benefit from a highly efficient um investment, and then we also have to have a good capital return policy because ideally we want businesses that can reinvest all of their cash flow and even more, take on debt and uh expand the business.
• 18:13
  SPEAKER_00: But in reality, the highly successful businesses are generating too much cash to reinvest it all, and then we ideally want um all excess cash returned to owner so that we can decide what to do with it, be that through share buybacks at opportunistic prices or just as dividends.
• 18:33
  SPEAKER_01: It's funny you say that.
• 18:35
  SPEAKER_01: We actually made a podcast a few weeks ago, I think it was called Five Universal Laws of the World Applied to Investing, and I'm not sure what the I'll have to look it up, what the law exactly was, but it was about um once people start using a metric, 50 years ago, or let's say 30 years ago, it was the price-to-book ratio.
• 18:59
  SPEAKER_01: Everybody just looked at the book value of a company, and it was a great way to find a lot of great companies, uh cigar butt investing, uh Buffett used to call it, I believe.
• 19:10
  SPEAKER_01: But once people start using a metric and it becomes so mainstream, so ROIC is one of these metrics that everybody just looks at right now, it actually kind of doesn't work, start working anymore.
• 19:25
  SPEAKER_01: Because if everyone can see that a company has a return on invested capital of say 25%, everybody knows it's a great company, but the valuation will reflect that as well, so the returns won't be as good as before.
• 19:41
  SPEAKER_01: So I agree with you on that.
• 19:43
  SPEAKER_01: You have some really unique companies in your portfolio.
• 19:47
  SPEAKER_01: You share them publicly on your Substack.
• 19:49
  SPEAKER_01: Many of them, I believe, are European.
• 19:52
  SPEAKER_01: To give our listeners some examples, I believe Frosta, EVS, Sartorius Stadium, Pluxi, Eden Red, Ecker and Ziegler.
• 20:03
  SPEAKER_01: I mean, these are not the Nvidia's and Microsofts of this world.
• 20:07
  SPEAKER_01: So why why are you drawn to those types of companies?
• 20:11
  SPEAKER_00: Yeah, I um as I developed as an investor, I try to look at smaller companies.
• 20:17
  SPEAKER_00: I feel like it's it's much just a much more interesting experience.
• 20:22
  SPEAKER_00: You don't have the whole noise that you have if you look at NVIDIA.
• 20:26
  SPEAKER_00: Everybody has an opinion on Nvidia, you have hundreds of articles on it, and I would rather look at some some hidden champions that are not on everybody's radar, but that are consistently growing the business, oftentimes trading at cheaper valuations, and oftentimes they're being owner-led.
• 20:45
  SPEAKER_00: Um yeah, that's also why I shifted my geographical uh exposure over the last let's say two years, I think.
• 20:54
  SPEAKER_00: Um I don't really care where my companies come from as long as it's a democracy.
• 21:00
  SPEAKER_00: But I noticed that American companies are just trading at way too much of a premium, and that's why I um put most of my new money into European stocks and also some Latin American stocks.
• 21:16
  SPEAKER_00: And right now, without really forcing it, I have um diversified to a point where America is just 20% of my portfolio, 30% if we include Canada, and the majority actually is uh is Europe right now.
• 21:32
  SPEAKER_00: Uh we have a lot of great uh owner-operated companies, uh, a lot of the ones you you just mentioned.
• 21:40
  SPEAKER_00: And yeah, I'm very happy with um with this approach.
• 21:45
  SPEAKER_00: And so far it has worked out well, especially this year, and we'll see how it continues in the future.
• 21:52
  SPEAKER_00: A lot of uncertainty, especially in the American market, and I mean even after the small correction uh US dollar.
• 22:00
  SPEAKER_00: Still trade at a very large premium, and we need to see if the premium is justified.
• 22:07
  SPEAKER_00: It certainly is for some companies, they have some amazing businesses over there.
• 22:12
  SPEAKER_00: But I would not be comfortable at this point to just outright own an American index, for example.
• 22:19
  SPEAKER_01: Yeah, there's a lot going on, and I'm no fortune teller, but I would say that in the long run, say 10-20 years from now, this uncertainty and America pushing us away, and by us I mean Europe, is going to be net positive for Europe.
• 22:41
  SPEAKER_01: They are investing a lot more into the European um landscape right now.
• 22:49
  SPEAKER_01: I think this will benefit European companies in the long run.
• 22:53
  SPEAKER_01: We'll have better connections with countries and um that are closer to us.
• 22:59
  SPEAKER_01: I think we'll have a better relationship with China in the long run, with Canada, with I mean, we are sticking to our values, and I think in the long run this will pay off.
• 23:08
  SPEAKER_01: And your European portfolio is is poised to benefit from that.
• 23:12
  SPEAKER_01: Uh, I I believe.
• 23:14
  SPEAKER_01: Are there any specific traits or red flags that make you skip over a company even when it looks very cheap on a valuation basis?
• 23:25
  SPEAKER_00: Yeah, so I I try to avoid companies with unpredictable earnings and high churn.
• 23:32
  SPEAKER_00: Something I look at is recurring revenue and um also visibility of revenue.
• 23:38
  SPEAKER_00: And over time I noticed that most of the times I got burned, it is in an industrial uh like a cyclical business where I did not understand the cycle correctly, where earnings is falling off a cliff, for example, or where um projections from management are just way off.
• 23:56
  SPEAKER_00: And having predictable businesses um counteracts that.
• 24:53
  SPEAKER_00: So just way too much of an integration risk and just way too high of a leverage need for needed for that.
• 25:01
  SPEAKER_00: So I would I would call it Empire Building, and I'm not a fan of that.
• 25:05
  SPEAKER_01: I would like to dig into something that sits at the heart of your approach, figuring out what actually makes a business great.
• 25:14
  SPEAKER_01: Because it's one thing to say this is a good company, this is a great company, this is a bad company, but it's another to explain why, what gives it staying power, uh what allows it to keep growing, defending its turf, and reinvesting at high returns year after year, the uh reinvesting runway you mentioned previously.
• 25:38
  SPEAKER_01: And for a lot of long-term investors like yourself and us, the answer tends to come back to the idea of a mode, right?
• 25:47
  SPEAKER_01: The buzzword mode, something that protects the business.
• 25:50
  SPEAKER_01: So, in your experience, what are signs of a truly durable competitive advantage other than what everybody can see, say a high return on invested capital, for example?
• 26:04
  SPEAKER_00: I think one part is what kind of mode it is.
• 26:08
  SPEAKER_00: Um, oftentimes duopolies or um uh oligopolies with a few players are are pretty uh interesting because you have great scale effects, you have network effects, and oftentimes it's very hard for new entrants to convince customers to come to them.
• 26:26
  SPEAKER_00: For example, um Pluxy and EdenRed, um it's not a real duopoly, but I think they have like 65 or 70% of the market in employee benefits.
• 26:37
  SPEAKER_00: Pretty hard to convince a new um SNU um entrant into the market to convince customers why they would use their network instead of the already established ones with uh more services and just uh a larger network.
• 26:53
  SPEAKER_00: That's one part.
• 26:54
  SPEAKER_00: I also like uh focused pure plays.
• 26:57
  SPEAKER_00: I don't like companies who are too diversified into different markets.
• 27:01
  SPEAKER_00: Oftentimes we have um a monopoly, or not a monopoly, but like a leader in an oligopolistic industry with distracted competitors.
• 27:12
  SPEAKER_00: A great example for that is Idex Laboratories, who does diagnostics for uh pets and other animals.
• 27:21
  SPEAKER_00: They have the market leadership, and their only competitors are a subsidiary of Mars and a subsidiary of Suetis.
• 27:31
  SPEAKER_00: So they are really the only company with a focus on it, and um it shows in their great performance over the last decades.
• 27:40
  SPEAKER_00: Oftentimes I also think um a long reinvestment runway is a sign of a durable advantage because it means that a company figured out how to scale their business, it's not just like they have a process.
• 27:55
  SPEAKER_00: And if scaling is done correctly, it also means that margins and RIC will elevate over time.
• 28:03
  SPEAKER_00: So those are some signs I look at.
• 28:06
  SPEAKER_01: Yeah, and perhaps even R O I I C return on uh invested incremental capital, right?
• 28:13
  SPEAKER_01: Which uh Yeah, exactly.
• 28:15
  SPEAKER_00: So so I I mostly just look at RIC and reinvestment runway, or like reinvestment rate.
• 28:22
  SPEAKER_00: You can combine those to ROIIC.
• 28:26
  SPEAKER_01: And yeah.
• 28:27
  SPEAKER_01: You mentioned duopolies as a sign of a strong mode.
• 28:31
  SPEAKER_01: In the case of a duopoly, say Visa and MasterCard, uh Eden Red and Pluxi, or even Boeing and Airbus.
• 28:40
  SPEAKER_01: Do you analyze both companies or do you buy both companies to avoid betting on the wrong one?
• 28:46
  SPEAKER_00: I mean that depends.
• 28:48
  SPEAKER_00: Um I started out, for example, buying Pluxi and later buying Eden Red.
• 28:55
  SPEAKER_00: In that case, I I should have started to look more seriously into Edenred earlier.
• 29:02
  SPEAKER_00: Um, I noticed that both companies are great, but there are also instances where um there is a duopoly without two great businesses.
• 29:11
  SPEAKER_00: I would say Boeing and Airbus is one example.
• 29:14
  SPEAKER_00: Boeing has a very troublesome history.
• 29:18
  SPEAKER_00: It's in my opinion a horrible company that's um cutting corners to push margins and in the end killed a lot of people that way.
• 29:27
  SPEAKER_00: Um I have not analyzed the business and neither did I do for Airbus, but that would be one instance where I certainly wouldn't own both.
• 29:38
  SPEAKER_00: Another example is um Copart, which I own.
• 29:42
  SPEAKER_00: They have a competitor in their duopoly, which is IAA, which got acquired um a year ago or two ago.
• 29:52
  SPEAKER_00: And Copart is consistently taking market share and having just um a way better focus, they are still owner-operated, and um they just have a much better culture and long-term uh focus.
• 30:06
  SPEAKER_00: So that's also one instance where Duopoly has a much better player, which to be fair, also trades at higher valuation.
• 30:15
  SPEAKER_00: So I I think oftentimes um these Duo Polis have very good economics, and oftentimes they are both run well, but it's it's not the case every time.
• 30:28
  SPEAKER_01: And for those that want to know how horrible of a company Boeing is, there is a great documentary on the topic you just uh mentioned, Downfall, the case against Boeing, and it's about um what you said, they're cutting corners, yeah, they missed on safety um procedures.
• 30:47
  SPEAKER_01: It's it's a lot it's a very good documentary, I highly recommend it.
• 30:52
  SPEAKER_01: And it was actually there was an analyst years before the documentary that said, How is it possible that Boeing has double the margins of Airbus?
• 31:03
  SPEAKER_01: They basically do the same thing, and years later it came out that they were cutting corners on safety procedures, and uh that's how they increased profits.
• 31:14
  SPEAKER_01: Crazy to think about.
• 31:15
  SPEAKER_00: Yeah, and especially if you are a business uh that's has such a big responsibility for keeping people safe.
• 31:24
  SPEAKER_01: Yeah.
• 31:25
  SPEAKER_00: And instead they they dumped hundreds, or I think, or almost a hundred billion dollars into buybacks at high prices, so also a a good case study on capital education.
• 31:38
  SPEAKER_01: Absolutely.
• 31:40
  SPEAKER_01: To expand a bit on modes, Elon Musk, uh the beloved Elon Musk, once said if your only defense against invading armies is a mode, you will not last long.
• 31:52
  SPEAKER_01: What matters is the pace of innovation, that's the fundamental determinant of competitiveness.
• 31:58
  SPEAKER_01: And whether you like Elon Musk or not, I'm not here to debate that.
• 32:02
  SPEAKER_01: I think there's truth in what he said there.
• 32:05
  SPEAKER_01: Some modes get lazy, others evolve.
• 32:08
  SPEAKER_01: So I'm curious where you land on this.
• 32:11
  SPEAKER_01: Do you believe most modes erode over time, or can they be maintained and strengthened?
• 32:19
  SPEAKER_00: Yeah, I think over the long term culture is almost as important as the mode.
• 32:24
  SPEAKER_00: It's very hard to assess, though.
• 32:27
  SPEAKER_00: There are some companies where they are said to have a strong culture, but at the end of the day, you can only really know that if you are an insider into the company.
• 32:36
  SPEAKER_00: We can just see from the outside, we can we can look at things like Glassdoor to get an opinion, but it's it's it's very hard to assess.
• 32:47
  SPEAKER_00: But I think if you have a great culture, it is a lot more likely that your company and your mode will uh continue to evolve and and grow.
• 32:59
  SPEAKER_00: A great example for for this is is Watsco, which is the leading distributor of HWAC um equipment in the United States.
• 33:11
  SPEAKER_00: They have a strong owner over uh owner Okay, let's do that again.
• 33:18
  SPEAKER_00: They have a strong ownership structure, and I think 60% of their employees uh own shares and have a good incentive.
• 33:27
  SPEAKER_00: They acquire businesses and then let them decentralize, operate, and it's it's working pretty well, and it will probably continue to go pretty well.
• 33:41
  SPEAKER_00: So we should look at at culture as well.
• 33:45
  SPEAKER_00: And if you have a strong culture, you will jump onto technological trends and you will continue to develop your business and and uh yeah, defend the mode.
• 33:56
  SPEAKER_00: An interesting example here also is um EVS Broadcast, which I think you also own.
• 34:03
  SPEAKER_00: They um had a breakthrough in the I think it was early 2000s, with their playback technology for sport events, and then they just um decided to to to um jump prices up.
• 34:20
  SPEAKER_00: Um they ended up with I think 60 or 70% eBit margins.
• 34:24
  SPEAKER_00: They just were milking customers and not really reinvesting, they were just um yeah, trying to milk it forever, and what's a price that does not work?
• 34:36
  SPEAKER_00: Competitors came in, made similar products, um, even though they were inferior to EVS, they were still a lot cheaper, and that made it uh attractive.
• 34:47
  SPEAKER_00: And they ended up having a I think whole decade decade with uh with declining results.
• 34:56
  SPEAKER_00: Then they got new management, which focused on the culture, focused on getting the company back to speed, and now it's a great success story again.
• 35:06
  SPEAKER_00: And also one of my largest positions.
• 35:10
  SPEAKER_00: So yeah, culture is um is essential if we want to know if a mode will last over time.
• 35:18
  SPEAKER_01: Yeah, I absolutely agree with you on that.
• 35:20
  SPEAKER_01: I think management and culture, soft fundamentals, I like to call it, are more important in the long run.
• 35:27
  SPEAKER_01: It might be a bit controversial or even an unpopular opinion, but that's just my view and uh your view, uh I s I guess.
• 35:35
  SPEAKER_01: It's something we as investors cannot really assess, which makes it so hard to grasp, right?
• 35:42
  SPEAKER_01: And investors don't like that.
• 35:44
  SPEAKER_01: They want certainty, they want hard facts, signs of a strong mode.
• 35:49
  SPEAKER_01: So having fast revenue growth, increasing market share, uh, high margins, good returns on capital are just things they prefer looking at.
• 35:59
  SPEAKER_01: Um and it makes sense, I mean we're all human.
• 36:02
  SPEAKER_01: And to close this section out, let's talk about some misunderstood modes.
• 36:08
  SPEAKER_01: The ones investors love to talk about, but maybe don't always interpret correctly.
• 36:13
  SPEAKER_01: Or maybe the ones that are actually very strong but don't look that way at first glance.
• 36:18
  SPEAKER_01: Is there a type of mode you think is overrated, or maybe one that's even underappreciated but quite powerful?
• 36:26
  SPEAKER_00: Um, I'll I'll look at this question from another angle.
• 36:29
  SPEAKER_00: What I um find very important and what which um increases in importance for me is recurring revenue and predictable revenue, especially if you can have a low churn rate over time.
• 36:44
  SPEAKER_00: It's an immense advantage if you can grow your business within your existing customer base and you don't have to use your um selling and marketing dollars to to recruit new customers.
• 36:55
  SPEAKER_00: You can instead focus on upselling your existing customers, and it's just a a great concept that um all most of the time ends up in very scalable businesses with high margins.
• 37:08
  SPEAKER_00: And I feel like a lot of companies uh rely on on single sales of large machines, for example, or on project bases, and yeah.
• 37:19
  SPEAKER_00: Ideally, you want a uh loyal customer base um which is growing moderately but is uh strongly upsetting uh from the existing base.
• 37:36
  SPEAKER_01: So I would love to talk a bit about your process.
• 37:40
  SPEAKER_01: Can you walk us through your research process from the moment you catch an idea?
• 37:45
  SPEAKER_01: I think you mentioned uh on our previous podcast that you find ideas everywhere, you like to copy ideas from others like Monish Pabrai and take a look at it yourself.
• 37:56
  SPEAKER_01: So, what does your research process look like?
• 37:59
  SPEAKER_01: You find an idea and then what?
• 38:02
  SPEAKER_00: Yeah, exactly.
• 38:02
  SPEAKER_00: I I like the concept of cloning.
• 38:05
  SPEAKER_00: We don't get any uh bonus points for creativity and investing.
• 38:10
  SPEAKER_00: I like to just read uh also on social media and just in conversations with other investors, and you you stumble across a lot of new businesses all the time.
• 38:22
  SPEAKER_00: And when I find something that sounds remotely interesting, I um I take a look at it, I do a quick check.
• 38:29
  SPEAKER_00: Um oftentimes the investor presentation is a good good point for that.
• 38:34
  SPEAKER_00: You see how the business is portraying itself, and if I like what they what I say, if it if it ticks my boxes, I I go deeper.
• 38:43
  SPEAKER_00: I run it through my quality score and I do evaluation.
• 38:46
  SPEAKER_00: And if it's still interesting, then I'll uh dive deeper and look into the annual reports and additional resources.
• 38:57
  SPEAKER_00: And if it is still a good business, then and if it's more attractive than what I already own, and if I have cash, of course, then I start a position or keep it on a watch list.
• 39:09
  SPEAKER_01: So is the quality checklist like the final decision, or is it more of a pre-selection checklist where it passes most of your quality checklist and then you start doing more research?
• 39:22
  SPEAKER_00: It's mostly just a a somewhat structured way to think about a business and to see if it ticks my boxes, if it has a strong balance sheet, if it has uh strong margin development, if there is a secular trend behind it, if management uh sounds credible and is incentivized, right, if there is a good growth opportunity and if it's effectively run.
• 39:48
  SPEAKER_00: Um so I don't buy my companies based on the quality score.
• 39:55
  SPEAKER_00: It's it's just a mental crutch, I would say, to make companies somewhat comparable and to quickly assess what are their strengths and what are their weaknesses.
• 40:05
  SPEAKER_01: I see.
• 40:07
  SPEAKER_01: So, how do you build conviction in the smaller companies you own?
• 40:12
  SPEAKER_01: I mean, if you own Microsoft, for example, and it drops 20% the next day, um, I wouldn't be too worried.
• 40:20
  SPEAKER_01: I think Microsoft will still be here 10, 20 years from now.
• 40:24
  SPEAKER_01: It's one thing to build conviction in a large blue chip company in a well-known compounder, but it's another to feel confident in a smaller, lesser known company, perhaps small caps or even micro caps.
• 40:37
  SPEAKER_01: Many of your companies are not large companies if you uh look at it on a market cap scale.
• 40:43
  SPEAKER_01: So, how do you build that conviction in these smaller names?
• 40:48
  SPEAKER_00: Uh what I like is owning companies with long histories.
• 40:52
  SPEAKER_00: And even if we take Pluxia as an example, um they went public um as a spin-off a year ago, but they still have a I think 40-year history underlying the business.
• 41:04
  SPEAKER_00: So if we know that the business has been around for a long time and has management that owns shares uh in large quantities, then that's already a good point.
• 41:16
  SPEAKER_00: We want to to know how management thinks, at least roughly, to know if they are in for the long term or not.
• 41:24
  SPEAKER_00: And uh at the end of the day, we can only do so much as investors.
• 41:29
  SPEAKER_00: I need to feel comfortable with the management.
• 41:32
  SPEAKER_00: If I and and sometimes you own a business and you you notice that you are not confident with the management, then that's then often a good sign to to sell the position or think about trimming.
• 41:43
  SPEAKER_00: What's definitely a a um point with smaller companies is volatility and especially liquidity.
• 41:53
  SPEAKER_00: Um I think there was a a week last year where there was no single froster share traded for for a whole week.
• 42:02
  SPEAKER_00: So if you buy these smaller companies, um a a rather small buy or sell can can drive prices.
• 42:13
  SPEAKER_00: So um you need to understand the overlying growth trends.
• 42:18
  SPEAKER_00: And if news come out, you need to think about if it actually matters over the long term.
• 42:24
  SPEAKER_00: And I think for especially for nanocaps, um I recently bought a business which is by by far my smallest market cap with I think like 30 million.
• 42:35
  SPEAKER_00: And I noticed that it is a lot more volatile than than the other things I own.
• 42:41
  SPEAKER_00: Not sure yet if I like it, it's a small test position with I think just one or two percent of my portfolio.
• 42:49
  SPEAKER_00: So, yeah, it's a process.
• 42:51
  SPEAKER_00: We we uh buy a business and then we see if we are comfortable with it over time.
• 42:58
  SPEAKER_00: And yeah, eventually the the good ones, the ones you like will stick around and the others will be sold.
• 43:05
  SPEAKER_01: I would love to shift gears to evaluation because when you find a great business, which we mentioned, you have a strong mode, you find great management, it has predictable growth, it has a long reinvestment runway, but at the end of the day, the price you pay still matters, and that's where things get tricky.
• 43:23
  SPEAKER_01: I think that's where most investors make their mistakes, besides their uh selling too soon or buying too uh too early.
• 43:31
  SPEAKER_01: Everyone has their own approach.
• 43:33
  SPEAKER_01: Some run full models, some rely more on mental math, others lean on comparisons or past experience.
• 43:40
  SPEAKER_01: So, how do you go about valuing a business?
• 43:43
  SPEAKER_01: Do you look at multiples or do you lean more towards intuition?
• 43:47
  SPEAKER_00: Yeah, so this process, of course, also developed over time.
• 43:51
  SPEAKER_00: Um, in the beginning, I was just using very basic metrics like PE ratios, and at some point uh during the the height of the Pandemic madness, I even valued some companies on price to sales and price to gross gross profit metrics.
• 44:09
  SPEAKER_00: Then I started to look into inverse DCF or reverse DCF, however you want to call it, where you basically try to find out what assumptions the market is making for the business to grow at to achieve a let's say 10% return.
• 44:28
  SPEAKER_00: The problem with inverse DCF and DCFs in general is that you punish high-quality businesses with the perpetual growth rate.
• 44:40
  SPEAKER_00: So after most most DCFs are on a 10-year basis, and you have your your growth rate for the next five years, for the following five years, and after year 10, growth drops to GDP, so most of the time to 2 to 2 or 3% growth.
• 44:59
  SPEAKER_00: I would argue that a high-quality business will not decelerate from 10% to 3%, and that makes DCS pretty tricky, and oftentimes makes high-quality businesses look overvalued.
• 45:15
  SPEAKER_00: So what I started to do is using an IRR model, which uses an exit multiple instead.
• 45:46
  SPEAKER_00: And then lastly, we have an exit multiple.
• 45:49
  SPEAKER_00: Of course, this approach has more assumptions we have to make, but I feel like if we we stick to conservative estimates, we don't project um horrendously high uh growth rates and we have realistic um exit multiples.
• 46:08
  SPEAKER_00: A lot of the times I um try to model with um decreasing multiples.
• 46:13
  SPEAKER_00: Like I don't feel comfortable putting much more than 20 20 times um as an exit multiple, even if the company is growing fast.
• 46:26
  SPEAKER_00: So I feel like um that way we can get a good general grasp if we use this approach and have um a bull, bear, and and base case.
• 46:38
  SPEAKER_00: So that's what I've been doing over the over the last year.
• 46:43
  SPEAKER_00: But really, you can you can also simplify this process.
• 46:46
  SPEAKER_00: Um an idea should be a no-brainer if you want to buy it.
• 46:51
  SPEAKER_00: I don't really care if I get a 10.7% or a 10.65% IRR.
• 46:59
  SPEAKER_00: I care if it's 15% or 20%.
• 47:02
  SPEAKER_00: Um yeah, and at that point we have a good margin of safety.
• 47:08
  SPEAKER_00: And yeah, there are some businesses right now that have um declined a lot or gone sideways for a long time, like IDEX Laboratories or MSCI, but I still um do not find them cheap enough.
• 47:22
  SPEAKER_00: So eventually they will become a no-brainer and I will buy them or they will not, and that's that's how I look at valuing high-quality businesses.
• 47:33
  SPEAKER_01: So, what does your cell discipline look like?
• 47:36
  SPEAKER_01: Is it purely valuation driven?
• 47:38
  SPEAKER_01: Is it a combination of a thesis-driven and valuation?
• 47:42
  SPEAKER_01: Is it more instinctive?
• 47:44
  SPEAKER_00: Yeah, it depends.
• 47:46
  SPEAKER_00: Um, I have sold for all cases um you mentioned.
• 47:50
  SPEAKER_00: There were situations where I just noticed that I'm not that um comfortable owning the company.
• 47:56
  SPEAKER_00: Um, that could be, for example, that um that I um when I owned um Asht Group, which uh rents out um equipment for uh construction and other sectors, um the economics are good, but I'm not that comfortable with the very high capital intensity of the business.
• 48:17
  SPEAKER_00: So I um ended up selling.
• 48:20
  SPEAKER_00: Then there were also cases where the investment just doesn't work out, where um growth uh is way behind um what I expected, where management um is just way off on the estimates, and then there is also um just valuation.
• 48:39
  SPEAKER_00: I try to update my evaluation once a month for my portfolio update, or um also more frequently if there is a big price decline, for example.
• 48:51
  SPEAKER_00: Um yeah, if a company falls to a an IRR of like um 5%, 6%, then I start to consider trimming.
• 49:02
  SPEAKER_00: Because usually I have uh enough options with with higher IRRs of 15% plus.
• 49:09
  SPEAKER_00: So um I try to not trim too much, but if a company just gets way too overextended, and if I don't see a credible way to make um good returns over the long term or the medium term, then uh I'm thinking about trimming because um it happened enough times in the past where stocks are overextended and then correct again and you get a better entry point again.
• 49:38
  SPEAKER_00: Uh yeah, but we we need to make sure that they are not just some overvalued, but that they are really overvalued.
• 49:46
  SPEAKER_00: Because we uh always have to keep in mind that selling a stock um causes some some tax implications, and taxes can eat up a lot of returns if we we trade in and out too much.
• 50:01
  SPEAKER_01: Yeah, it it depends where you where you live, right?
• 50:04
  SPEAKER_01: It's probably different everywhere, but uh overall uh it is something to look at.
• 50:11
  SPEAKER_01: Before we wrap up, I always like to end with a bit of a forward-looking curiosity.
• 50:18
  SPEAKER_01: You've already given us a ton to think about, but I'm sure your research pipeline is still full.
• 50:23
  SPEAKER_01: So for anyone listening who wants to dig a little bit deeper or maybe get a head start, are there any companies or industries you're currently looking at, something that caught your eye lately or might be interesting to keep an eye on?
• 50:38
  SPEAKER_00: Yeah, so so one company I recently analyzed more deeply and also wrote about it on Substack is IDEX Laboratories.
• 50:46
  SPEAKER_00: As I already mentioned, um they do diagnostics for animals, especially um pets, and it's just a fun, fantastic business.
• 50:58
  SPEAKER_00: It has one of the highest rankings uh I I've had in my quality score, and I'm hoping that they drop more in price so I can own it.
• 51:07
  SPEAKER_00: Then I also looked at MSCI, which um most people probably know, which also has scored very highly, and that I would love to own at the right price.
• 51:19
  SPEAKER_00: Then I also recently looked at a more unknown company, a recent IPO from France, uh Planersware, which does um project um project management software, which is a very sticky um SARS business.
• 51:35
  SPEAKER_00: Um I still would like it a bit cheaper, especially because um I have not had the best um time with the last when when I bought an IPO the last time with Pluxi.
• 51:48
  SPEAKER_00: Uh the problem with with IPOs is that you don't have a public record of the business, you know that they have a long, long history of running the business, but you don't know management well.
• 52:00
  SPEAKER_00: There is not much out there, so I'm trying to be a little bit more um more cautious this time with with this company.
• 52:10
  SPEAKER_01: Yeah, I I tend to have a rule for myself, but it it depends on uh it's different for everyone.
• 52:15
  SPEAKER_01: I I avoid IPOs for the first 24 months.
• 52:18
  SPEAKER_01: Um but yeah, overall IPOs can be interesting, but they're usually pretty expensive when they come to the public markets.
• 52:27
  SPEAKER_01: That's the reason they come to the markets anyway.
• 52:29
  SPEAKER_00: So yeah, that that's also why spin-offs can be very interesting because they oftentimes don't go to the market because they are expensive and want a high valuation, but because a business wants to streamline its operations and yeah, yeah, separate oftentimes also a faster growing business that might do better in a in the as a standalone company.
• 52:52
  SPEAKER_01: Yeah.
• 52:54
  SPEAKER_01: Zooming out for a second, heavy mode investments has grown into something a lot of investors really value.
• 53:00
  SPEAKER_01: I think you're close to uh 10,000 subscribers now.
• 53:04
  SPEAKER_01: Um, we follow you closely, we like it a lot.
• 53:08
  SPEAKER_01: And it's clear you're not just throwing out ideas, you're building something with care.
• 53:12
  SPEAKER_01: So I'm curious to think about your next chapter.
• 53:16
  SPEAKER_01: What is the goal with heavy mode investments?
• 53:19
  SPEAKER_01: Where will you take it over the next few years?
• 53:22
  SPEAKER_00: Yeah, for now I'm not changing much.
• 53:25
  SPEAKER_00: I want to continue journaling my process.
• 53:28
  SPEAKER_00: I want to deliver value to my subscribers and we'll see where it goes.
• 53:34
  SPEAKER_00: Um I've got a good uh foundation, but it's not something that I could uh live off yet.
• 53:41
  SPEAKER_00: But maybe over the next uh year or two I can um grow it into something bigger where I could actually decide to to make it my full-time profession.
• 53:52
  SPEAKER_00: But ideally I would um work towards making it a a big enough um source that I can contribute um most of my time to it.
• 54:03
  SPEAKER_00: Um but yeah, time will tell.
• 54:05
  SPEAKER_00: I'll um continue to stay true to my ways and not um try to engagement farm like most people um sadly are doing.
• 54:16
  SPEAKER_00: Um it's it's also going over to Substack, I feel like um not a trend I like, but that's uh the nature of the business, and uh yeah, we'll see where it takes me.
• 54:29
  SPEAKER_00: So where can people follow you and learn more?
• 54:31
  SPEAKER_00: Yeah, the best place is my Substack, Heavy Mode Investments.
• 54:35
  SPEAKER_00: Besides that, I'm also on Twitter, but I'm not that active at the moment because I don't like the direction it's going.
• 54:42
  SPEAKER_00: And especially in these times, um like most like half of the posts on my timeline about tariffs and and other things and politics and just stuff I don't want to read about all the time.
• 54:56
  SPEAKER_00: So the best way is Substack.
• 54:59
  SPEAKER_00: You can also message me there.
• 55:01
  SPEAKER_00: My messages are open and yeah, always happy to answer questions and you can also participate in my in my chat.
• 55:11
  SPEAKER_01: To end on a positive note, what advice would you give to someone starting out today, trying to get better, trying to build insights as an investor?
• 55:22
  SPEAKER_01: What advice would you give to uh to someone?
• 55:25
  SPEAKER_00: Uh I would tell people to start journaling.
• 55:28
  SPEAKER_00: Think about your ideas and write them down.
• 55:31
  SPEAKER_00: That way you can be honest to yourself and and grow as an investor.
• 55:35
  SPEAKER_00: There are so many communities and publications out there that you can have good conversations, you can challenge your ideas, you can figure out new ideas.
• 55:46
  SPEAKER_00: Um yeah, so I I would definitely try to to put yourself out there.
• 55:52
  SPEAKER_01: Doesn't have to be public, you can you can just message people and yeah, yeah, and to add to that, don't be afraid to ask questions, make mistakes, and journal is a very good way of keeping yourself responsible.
• 56:08
  SPEAKER_01: So uh a great tip to to end this conversation.
• 56:12
  SPEAKER_01: Uh it's a wrap, Nicholas.
• 56:14
  SPEAKER_01: Thank you so much for coming on the show once again.
• 56:18
  SPEAKER_01: We uh really do appreciate it.
• 56:20
  SPEAKER_00: Yeah, thank you for having me.
• 56:22
  SPEAKER_01: Enjoy your day out in the sun, and uh we'll talk to you again soon.
• 56:26
  SPEAKER_01: Bye, everybody.