Latest / The Dutch Investors / #45 | The multibagger playbook | Interview w/ 100-bagger hunting | Part 2

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#45 | The multibagger playbook | Interview w/ 100-bagger hunting | Part 2 · The Dutch Investors

• 0:00
  SPEAKER_01: Welcome back to another episode by the Dutch Investors.
• 0:03
  SPEAKER_01: Last time Kevin and I ended up talking for over an hour about multibaggers, how to find them, what to look for, and honestly, it felt like we were just getting started.
• 0:14
  SPEAKER_01: So today we're picking up right where we left off.
• 0:18
  SPEAKER_01: And we want to dive deeper into the role of management, where to actually find these companies, how to build a research process that works, and maybe if we've got time, go over a recent case study as well.
• 0:32
  SPEAKER_01: Sounds good, Kevin?
• 0:34
  SPEAKER_00: Yeah, sure thing.
• 0:35
  SPEAKER_00: I'm ready.
• 0:36
  SPEAKER_01: Alright, let's let's jump in.
• 0:39
  SPEAKER_04: Could anyone do the same thing you did?
• 0:43
  SPEAKER_04: The first one attachment is not closed.
• 0:45
  SPEAKER_04: And the second one attackment is don't forget the first row and that's what the closer give up what you're doing.
• 0:51
  SPEAKER_04: Well, because of guesses about what's going to happen.
• 0:55
  SPEAKER_04: It just doesn't make any sense to us.
• 0:56
  SPEAKER_04: I mean, we are going to be hired for things over time.
• 1:00
  SPEAKER_03: I needed to get ahead of the comedian's idiots.
• 1:03
  SPEAKER_03: Luckily, there's a large supply.
• 1:06
  SPEAKER_02: Are you born with it?
• 1:08
  SPEAKER_02: Is it DNA?
• 1:09
  SPEAKER_02: Is it some early childhood exposure?
• 1:15
  SPEAKER_01: Just to kick things off, uh last time we talked about uh everything about multibaggers, but we skipped over the part that actually runs the ship, management.
• 1:25
  SPEAKER_01: So, what role do you think management quality and management overall plays in your analysis when trying to find such a compounder?
• 1:35
  SPEAKER_00: Yeah, um I have I have a bit of an evolution on management in my in my process, but as you mentioned, you have the ship and the captain, or you have the analogy with the like the horse and the jockey, and then what do you want first?
• 1:50
  SPEAKER_00: Do you want a beautiful ship and a lousy captain or a good captain, or do you want the best horse with uh a great jockey?
• 2:00
  SPEAKER_00: It's a bit like uh, and and Warren Buffett always already said it before, of course.
• 2:05
  SPEAKER_00: Um no, I think it was a quote from Peter Lynch, um who said that that it's better to have uh a great business because um at a certain moment in time it could be that an idiot is running it.
• 2:21
  SPEAKER_00: Um now if you if you look at the the analysis that has been done in the past on multi baggers and 100 baggers, um Chris Mayer specifically introduced or mentioned uh the book written by William Thorndike on outsiders, where he talks about exceptional capital allocators at the helm of these uh companies.
• 2:46
  SPEAKER_00: So it is part of my checklist.
• 2:49
  SPEAKER_00: But imagine that I find a wonderful business and the management is like maybe there's not a lot of information uh available about that person, it will not detract me, it will not really be a red flag.
• 3:04
  SPEAKER_01: Um it can be quite the opposite, right?
• 3:06
  SPEAKER_01: In the case of um Constellation Software or even the founder of Dino Polska, where there's not many interviews to be found.
• 3:14
  SPEAKER_00: Yeah, of course, of course.
• 3:16
  SPEAKER_00: Uh you've you have like these small anecdotes, like, for example, the the chairman of of Dino Polska.
• 3:23
  SPEAKER_00: There's like stories going around when he was like nitpicking or uh counting every penny when he was more involved in the business at a younger age.
• 3:33
  SPEAKER_00: Um, but yeah, you there's not a lot of public information available about him, so it's very difficult to judge his persona and the impact he has on the business.
• 3:45
  SPEAKER_00: Um, but I do I still do a full analysis because I think it's important, especially um to have the incentives, uh an alignment of incentives between you as a shareholder and the management that is running the business.
• 4:00
  SPEAKER_00: That that I find important.
• 4:01
  SPEAKER_01: And and do you think the size of the company plays a role in how important you think management is overall?
• 4:08
  SPEAKER_00: Uh that may be true, because um when you go from a really small company, um, like a$50 million company doing$10 million in revenue, and imagine that it only has one single product or one single service, then the impact of the decisions that the person makes can be detrimental or very positive for the business.
• 4:32
  SPEAKER_00: When when the business is already a lot bigger, it's more diversified by its own nature, then management decisions can still play a big role.
• 4:44
  SPEAKER_00: But even if the CEO decides to like do an acquisition and the acquisition is bad, it doesn't mean that the company will go bankrupt.
• 4:54
  SPEAKER_00: And with a microcap company, that could be the case.
• 4:57
  SPEAKER_00: One bad decision can effectively lead to a bad outcome.
• 5:02
  SPEAKER_01: Yeah, that makes sense, especially in the smaller earlier stage companies where there's less structure and more uncertainty.
• 5:10
  SPEAKER_01: So, can you give me a few examples and characteristics you look for in management teams or in CEOs?
• 5:18
  SPEAKER_01: Uh, perhaps a couple of examples of CEOs you really like, or management teams you really like, uh, or even dislike.
• 5:27
  SPEAKER_00: So we ended uh the last episode on humility, yeah, and that may be the first characteristic what I would be looking for.
• 5:35
  SPEAKER_00: I don't want like super flashy CEO, super salesman.
• 5:39
  SPEAKER_00: I mean, sales is important, but there's you you almost want the guy who is super competent and he doesn't really want to run the company.
• 5:49
  SPEAKER_00: People come to him or her uh and ask him him to run it because everybody recognizes the the professionalism and the talent that the coozes out of his pores.
• 6:01
  SPEAKER_00: Uh so that's almost the guy or the woman you want.
• 6:06
  SPEAKER_00: Um, one other important characteristic, and that's the main reason why I sometimes listen to earnings calls, because um reading always goes a lot faster than listening.
• 6:18
  SPEAKER_00: So, why would you listen to an earnings call?
• 6:21
  SPEAKER_00: It's to try to um read between the lines, it's to get an impression uh if there's a video non-verbally, but if there's no video then verbally on how the person talks, um, because you can get a lot of information about who that person is.
• 6:42
  SPEAKER_00: Um, and mainly I want someone who is ready to admit mistakes.
• 6:48
  SPEAKER_00: So imagine there's a business and there has been some kind of problem.
• 6:54
  SPEAKER_00: Certain CEOs will just wave it away, they will um hide the problem within like uh a story, and they will try to sell it to the investors because they don't want uh a short-term impact on the stock price.
• 7:10
  SPEAKER_00: But there are other CEOs who just admit the mistake uh and they will say, This is what we did wrong, and this is what we are going to do in the future, and maybe the stock will react uh the next day, but they are focused on the long term and the medium term, and they they acknowledge that they need to learn from their mistakes, and for me, those are the best ones.
• 7:35
  SPEAKER_00: And now maybe there is one other trait I also look for, and it's it's I I talked about it in the past about ambition.
• 7:44
  SPEAKER_00: I think the best ones they can they can zoom out and they can zoom in.
• 7:50
  SPEAKER_00: So, what I mean by that is you have a person who has a long-term vision, who has an ambition, and who can articulate that vision into a strategy, into how to get there, and eventually into specific actions.
• 8:08
  SPEAKER_00: And I call that zooming out, but then the same person has to be able to zoom in into the details and like be passionate or almost like a maniac about the details surrounding its product or service they're selling and about their customer, and that's pretty rare.
• 8:30
  SPEAKER_00: You you find people who can have that ambition, or you can find people who are crazy about the products, but then don't have the vision.
• 8:40
  SPEAKER_00: Uh, and and I look for both.
• 8:42
  SPEAKER_00: I try to find both.
• 8:44
  SPEAKER_01: Let let me try something.
• 8:46
  SPEAKER_01: Let me give you like uh three or four names, and you just give me your gut feeling on the on the CEO.
• 8:52
  SPEAKER_00: If I if I know them, yeah.
• 8:54
  SPEAKER_01: I I think you know them.
• 8:55
  SPEAKER_01: Um first one, Elon Musk.
• 8:58
  SPEAKER_00: Yeah, he has both.
• 9:00
  SPEAKER_00: Okay, it's it's just the only problem with Elon Musk is everything he does on the side, I think.
• 9:07
  SPEAKER_00: Uh, but he's one of the unique uh ones, I think.
• 9:12
  SPEAKER_01: Satya Nadella from Microsoft, yeah, same thing.
• 9:16
  SPEAKER_00: Because Satya, uh, I don't know him in detail, of course, but he has made some incredible decisions in the past that impacted a very big company, and he he's also very knowledgeable about technology behind it.
• 9:33
  SPEAKER_00: So I think he also categorizes as a great one.
• 9:36
  SPEAKER_00: Yeah.
• 9:37
  SPEAKER_01: Um, perhaps the the last one, and this one is sometimes I think it is one of the best CEOs, and he's brilliant, but at the same time, he's becoming more of like a salesman as well.
• 9:49
  SPEAKER_01: So uh what about Jensen Huang from uh Nvidia?
• 9:53
  SPEAKER_00: Yeah, I I know what you mean, and especially in in the in the more recent times, he's he's become a bit more flashy, a bit more popular in the news with his letter jacket.
• 10:04
  SPEAKER_00: Uh, and yeah, I know what you mean.
• 10:06
  SPEAKER_00: Yeah, you're looking like for people that the the people you mentioned, probably Satya is like the more normal one.
• 10:15
  SPEAKER_00: Um Musk is unusual, and Jensen Huang too is like a bit unusual because I I I saw a talk about him where where he was talking to I think it was students from Stanford or something, where he talks about uh business and what what the what do I what he thinks they should do.
• 10:36
  SPEAKER_00: And what he said was, I wish you I wish you a lot of suffering.
• 10:41
  SPEAKER_00: Because his his idea is that through suffering you learn and you develop new things, and if you if you like stay in your comfort zone and there's never never any setbacks, his his prime focus is to develop resilience, and that that I found fascinating.
• 11:00
  SPEAKER_00: But I do agree it, yeah, maybe because of the success of NVIDIA, um, yeah, it it goes more into the sales aspect now than uh it I don't also think he does a lot more interviews than before, a lot more appearances.
• 11:14
  SPEAKER_01: Yeah.
• 11:15
  SPEAKER_01: Yeah, sometimes it's difficult to assess, you know, where one quality in one of the CEOs doesn't necessarily mean that it's a good or bad characteristic uh in another CEO, and especially for the ones we just mentioned.
• 11:30
  SPEAKER_01: The difficult thing is that the unpredictability by some CEOs, I just want a CEO that I can rely on that is brutally honest to me, that whenever things are going bad, just tell the shareholders when things are going good, tell the shareholders.
• 11:46
  SPEAKER_01: And with for example, I really like Satya Nadella, I think he made Microsoft into what it is today.
• 11:52
  SPEAKER_01: Um, perhaps another one is Tim Cook from Apple, excellent CEO.
• 11:56
  SPEAKER_01: And the thing I don't like about Elon Musk and even Jensen Huang, even though they are both exceptionally smart and they are capable CEOs, the reliance on the two, I mean Tesla is fully reliant on Musk and Nvidia is 100% reliant on Jensen Huang, and the fact that I don't know what they're going to do, uh especially with Musk, and the unpredictability is would be one of the reasons to avoid the company for me personally.
• 12:25
  SPEAKER_00: Yeah, understands.
• 12:26
  SPEAKER_01: Yeah, yeah.
• 12:27
  SPEAKER_01: When we talk about these um the management team, uh one thing we didn't discuss yet is the valuation of a company, uh, especially for some quality companies, uh, what people always look for, they always look expensive on paper.
• 12:44
  SPEAKER_01: So, what do you think?
• 12:45
  SPEAKER_01: Um, what is your opinion on uh evaluation when you're looking for a company that is at going to 10x, 50x, perhaps even a hundred X return in the future?
• 12:56
  SPEAKER_00: Yeah, valuation is is um has to be adapted to the type of company or where the company is in its life cycle.
• 13:06
  SPEAKER_00: So you can't you can't lose use PE all the time, or just like you can't use uh a price to revenue uh multiple, and just like uh DCF cannot be used on all stages of the life cycle.
• 13:21
  SPEAKER_00: Now, to get into what you said about the um the great companies that also also always look expensive.
• 13:28
  SPEAKER_00: When you look in the past, since 2005, at a company like Monster Beverages, um, I think everybody and all listeners will know that Monster Beverage for the shareholder was an absolute absolute monster.
• 13:44
  SPEAKER_00: Um, I think it's like a 1400 bagger or something uh since since it did this IPO.
• 13:52
  SPEAKER_00: Um but when you look at the the price earnings multiple uh since 2004, it will be around 30 all the time.
• 14:03
  SPEAKER_00: And so somebody who was looking at the company in 2005, okay, the grump the company was growing fast, but then still they would say, huh, uh price earnings 30.
• 14:16
  SPEAKER_00: Uh a lot of growth is already priced in, but then what they underestimated was the duration of that growth because they just kept on growing for 20 years.
• 14:26
  SPEAKER_00: And if you use a standard DCF model, um probably you're going to plot it out 10 years because standard is five or ten years, so you're going to say 10 years of growth, and then finance theoret tells you to estimate a terminal value, and uh the terminal value, the growth cannot be higher than the GDB growth, so you're going to take like 2% or 2.5% in there, and what happens is you you greatly underestimate the value of the company, and so um the best way, and and this also comes from Peter Lynch, who says you you don't use a hammer to tighten a screw, you need to identify for each company where it is in its life cycle and what type of company it is, and only then decide how you're going to value it.
• 15:21
  SPEAKER_00: And one of the most popular uh ways to value is like do a reverse DCF, because in a reverse DCF, uh you're going to um look at the prices in the market and try to extract the growth rate that the market is thinking the company will have on the on the coming 10 years, and that makes it a lot easier because then instead the question changes, instead uh of the question being what is the value, the question becomes this is the growth that the market thinks is projected in the future.
• 15:59
  SPEAKER_00: Do you agree or do you or do you think it's overstated?
• 16:04
  SPEAKER_00: Um, and that changes the question a lot.
• 16:07
  SPEAKER_00: But in the end, it's it's it's an imprecise art.
• 16:11
  SPEAKER_00: Um and when you go looking for multibackers and hundred baggers, the price earnings multiple, if you go into the high growth phase, will not aid you, and a DCF will certainly not help you.
• 16:26
  SPEAKER_01: Well, then the question becomes: why value a company at all?
• 16:30
  SPEAKER_01: If all these multibaggers, Monster, Apple, Nvidia, always looked expensive on paper but still delivered massive returns, what's the point of valuing a company?
• 16:40
  SPEAKER_01: Perhaps all the people piling into these companies, Palantir, uh, Nvidia, won't look crazy 20 years from now.
• 16:48
  SPEAKER_01: So, how do you make sense of that?
• 16:50
  SPEAKER_00: Yeah, I think the most important thing when you go in those kind of companies is the analysis of the modes and the competitive advantage that they are still building, because uh these are usually pretty young companies, is more important than the valuation because what you're betting on is you're probably paying up for the company, but you're betting on the fact that it will dominate its market for a very long time, and you need to get a better sense of do I think this company will continue to outperform more than 10 years?
• 17:29
  SPEAKER_00: Now it's very difficult to estimate that because um when I value a company, usually when you go into smaller companies, uh, I only look three years ahead.
• 17:40
  SPEAKER_00: I just want to know what the operational profit normalized will be in like two or three years, because beyond that it's very difficult, and if you set a high hurdle rate, then you want to find these kinds of situations where you have a pretty high probability of saying uh this is going to double in the next five years.
• 18:04
  SPEAKER_00: With the type of companies like a Palantir, of course, this you can't do this because you it's it's too difficult even for the next three years to estimate what the operational profit will be.
• 18:16
  SPEAKER_00: I think if I remember, uh Palantir is it not trading at like a price revenue of 60 or something?
• 18:24
  SPEAKER_01: Yeah, I think it's close to 100 now, but yeah.
• 18:27
  SPEAKER_00: 100, yeah, but that's I I mean we're we're getting into like absurd valuations because that would mean that it needs a massive, massive revenue growth to justify uh the current price.
• 18:40
  SPEAKER_00: So maybe Palantir is a situation, it's like an extreme situation.
• 18:46
  SPEAKER_00: There are maybe other companies out there who are growing fast too, uh, but not as as expensive.
• 18:52
  SPEAKER_01: So you talked about the runway, the duration of these exceptional growing companies, but that sounds a lot easier than it actually is because most companies go through drawdowns of say 30, 50, 70 percent.
• 19:08
  SPEAKER_01: Uh I believe Amazon back in the day dropped 90% from the from their peak and then needed like 10 or 15 years to recover.
• 19:18
  SPEAKER_01: So it sounds very easy to just buy great companies and then hold them for as long as possible.
• 19:24
  SPEAKER_01: But do you have any mental models or tricks you use to hold on to these compounders?
• 19:30
  SPEAKER_00: Yeah, the the basic the basic idea is still that you need to know the company.
• 19:37
  SPEAKER_00: Like, imagine imagine like there's a thousand investors that own a certain company, and you've owned a company for a couple of years and you know it.
• 19:45
  SPEAKER_00: Um, one of the things you can do is you need to be in the top 1% uh of how good do I know this company?
• 19:54
  SPEAKER_00: Because it's it's the knowledge that will help you have conviction to hold it, and you would be surprised even when you are on a call with professional analysts, you need to understand that the professional analysts uh sometimes they have to cover a lot of companies.
• 20:11
  SPEAKER_00: And for example, as a private investor, you have uh an advantage because, first of all, you can choose whichever whichever company you want to analyze, and secondly, you can go a lot deeper than them.
• 20:24
  SPEAKER_00: And when when I go, for example, to certain earnings calls on certain companies, when you hear the questions that are asked, there are sometimes questions so basic related to the business model that when when you hear these kind of questions, you already know that for that person that there can't be any conviction on the company, they're just like starting the research or something.
• 20:48
  SPEAKER_00: And so that's the for me, that's the first point, is to do very rigorous analysis.
• 20:55
  SPEAKER_00: And once you own a company, um you you have those that quote from Warren Buffett where he says our favorite holding period is forever.
• 21:06
  SPEAKER_00: But if you look at what Warren Buffett did over the last last 60 years, there's very, very few companies that he has hold all this time, he has held all this time, he has bought and sold a lot of companies.
• 21:21
  SPEAKER_00: And what I would say is if you find a great company, it's hold and monitor, so you need to keep track of it every quarter, it doesn't have to take a lot of time, but try to seize the opportunity to get to know a little bit more about the company than everybody else, because your knowledge in the company will compound, and if you leave if you keep researching other companies, even the research you did on the site for another company will help you.
• 21:49
  SPEAKER_00: And when the day comes that there is a 50% drawdown in price, there can be different reasons.
• 21:57
  SPEAKER_00: If it's an overall market drawdown and You can, like, for example, with the tariffs, you you had uh an overall market drawdown.
• 22:05
  SPEAKER_00: If after your initial analysis, you know, because for example, for my companies, um, there was only one company impacted.
• 22:14
  SPEAKER_00: It took me like maybe 10 minutes to to verify all my companies.
• 22:18
  SPEAKER_00: Why?
• 22:18
  SPEAKER_00: Because I know them, and I immediately knew they have nothing to do with these tariffs, it's impossible.
• 22:24
  SPEAKER_00: But there were companies in there that had drawdowns for 20%, and then I just said, okay, uh, or I buy some more, or I just leave it be and it will recover.
• 22:34
  SPEAKER_00: And that's the big strength you have if you really, really know the company.
• 22:38
  SPEAKER_00: Now, those are the easy ones because that's an overall market breakdown.
• 22:43
  SPEAKER_00: What when it becomes difficult is when there is a problem within the company, and the price follows the troubles within the company, so some in some kind of view it's logical, but then it becomes an analysis of the company itself.
• 22:58
  SPEAKER_00: And the more difficult question then is is this temporary or is it permanent?
• 23:02
  SPEAKER_00: And there I don't have any tricks or or thoughtful solutions.
• 23:08
  SPEAKER_00: It's yeah, you need to do the analysis and and yeah.
• 23:12
  SPEAKER_01: When you finally find such a company and decide to buy, what do you write down?
• 23:18
  SPEAKER_01: Me personally, I write down my thesis in a few sentences and I write down a few KPIs I want to keep track of whenever I listen to the earnings calls or I look at the um annual report.
• 23:31
  SPEAKER_01: Are there any things you write down before uh once you buy?
• 23:35
  SPEAKER_00: Yeah, so I do it in different stages because um my I mean a usual investor processing process is a funnel.
• 23:45
  SPEAKER_00: You start with a lot of ideas, you apply a first filter, and then you you say no to a lot of ideas, and then you go into a second stage and you say no again.
• 23:55
  SPEAKER_00: And more you advance in the funnel, more time you're going to spend on the idea.
• 24:02
  SPEAKER_00: And then once I get to the end of the funnel, it evolves into a deep dive.
• 24:07
  SPEAKER_00: So I will do like uh I will read everything that is available online about the company, if possible, get some expert calls, uh, try to have a solid understanding of the entire market, and then it could be that I buy the company.
• 24:23
  SPEAKER_00: But then what I do afterwards is I take one sheet of paper and I write down for myself on one pay on one uh A4 page why did I buy this company?
• 24:35
  SPEAKER_00: What and and the goal is to distill what I think is really important or essential about the company, and then I take that one A4 page and I turn it into one single paragraph.
• 24:51
  SPEAKER_00: And the single paragraph is when when people ask me, Hey, um I I know I know you own this company, pitch it to me.
• 25:00
  SPEAKER_00: I can pitch it in one minute, and in the pitch, it will be the most essential information or the most important information related to the company.
• 25:10
  SPEAKER_00: Um my feeling is because I I I go wide, try to amass all the information available, put it into a deep dive, and then I go back concentrated into 1A4 and one paragraph, it helps me, it helps build my conviction.
• 25:30
  SPEAKER_01: That makes sense.
• 25:32
  SPEAKER_00: Because when when you uh writing your your ideas down is already very important, but then clearly articulating your thesis to other people and getting pushback is also important, and it's not enough that just being able to write it down, I think you need to be able to explain it in a clearer manner, uh, what's it about.
• 25:58
  SPEAKER_00: And if, for example, if somebody asks me uh about a company, I do a pitch, and it lay I I pitch it in one or two minutes, and after the pitch they say I don't understand, then it means I didn't I did I need to do more work.
• 26:12
  SPEAKER_00: And this comes from um from Richard Feynman, who was I think one of the best teachers that have ever lived.
• 26:20
  SPEAKER_00: And he he he also said if you can't explain it clearly, you need to do more work because it means you don't understand the company.
• 26:29
  SPEAKER_00: I mean you mean you don't understand the problem enough.
• 26:31
  SPEAKER_00: In in this case, it's a company, but yeah.
• 26:34
  SPEAKER_01: I love the fact that you talk about companies instead of stocks.
• 26:38
  SPEAKER_01: Many people I talk to uh always mention stocks, and it doesn't bother me, but it always does tell me something about the way they think about uh investing, you know.
• 26:50
  SPEAKER_01: But um just wanted to throw that out there.
• 26:52
  SPEAKER_00: Yeah, by the way, there's a simple trick for that.
• 26:55
  SPEAKER_00: When you do an analysis, instead of talking about um like uh earnings per share or something, you do the analysis uh with the numbers like okay, I want to buy this company whole.
• 27:06
  SPEAKER_00: Imagine I have 10 billion and the company is worth 10 billion.
• 27:10
  SPEAKER_00: I'm gonna I'm gonna buy the company whole, and then you do the analysis on that standpoint, and then automatically your brain has to think in terms of companies because you're acting like the stock market doesn't exist.
• 27:23
  SPEAKER_01: Yeah, perhaps it doesn't work if you want to buy Microsoft for three trillion, but uh for all the for all the others uh it it might work, yeah.
• 27:31
  SPEAKER_00: Yeah, sure, sure.
• 27:33
  SPEAKER_01: So we talked about what makes a great business, we talked about how to spot potential multi-baggers.
• 27:40
  SPEAKER_01: Let's zoom out a little, uh, because where these companies operate and how you think about geography that plays a huge role too.
• 27:48
  SPEAKER_01: So, what regions or markets do you focus on when you're hunting for these multi-baggers?
• 27:54
  SPEAKER_01: I think uh you're mostly looking for very small companies that have the ability to grow their market cap perhaps a hundred times.
• 28:03
  SPEAKER_01: Where do you look for them?
• 28:04
  SPEAKER_00: Yeah, maybe maybe just um one comment on the size.
• 28:09
  SPEAKER_00: So it's true I look at smaller companies.
• 28:12
  SPEAKER_00: Um the last ones are below 500 million US dollars in market cap, but I think size is always relative to the market potential because even a$5 billion company can become a$500 billion company if it's penetrating and dominating a market that is growing like crazy.
• 28:37
  SPEAKER_00: So by accident for the moment I'm finding stuff really small, but usually I will be looking below 10 billion.
• 28:46
  SPEAKER_00: I I will rarely go beyond 10 billion, except if there's like a super high quality company, uh like I mentioned with with my my yin strategy when I'm I'm looking for a temporary downturn like Adiin, and then I will jump in.
• 29:02
  SPEAKER_00: Um but that's that's not the realm of where you're gonna find uh um like 100 baggers.
• 29:08
  SPEAKER_00: Now, when you look at um the research that has been done, um of course there have been a lot of multi-baggers from the US.
• 29:18
  SPEAKER_00: Um there have been some multi-baggers, like for example, in South Korea, uh and I think one of the most most fertile hunting grounds was Sweden.
• 29:29
  SPEAKER_00: Especially if you look at uh I'm talking about the last 20 years, especially if you look at the number of companies that became multibackers compared to the number of public companies they have.
• 29:41
  SPEAKER_00: Because of course, the US in absolute numbers they produced a lot, but they also have like a significant amount of public companies, so in a percentage-wise, it can still be low.
• 29:53
  SPEAKER_00: So that's one comment.
• 29:55
  SPEAKER_00: Um, now what about me?
• 29:57
  SPEAKER_00: Um, I'm a worldwide investor, so I'm not really um limited by geograph geography.
• 30:06
  SPEAKER_00: Um two or three years ago, I was finding a lot of stuff in Poland.
• 30:11
  SPEAKER_00: And now Poland is special because since the fall of the wall, um it has been, I think, the second fastest um growing company in GDP in the world over the last 20 years.
• 30:28
  SPEAKER_00: And of course, when you have that kind of you you this is like when you go surfing, it's like a big wave surfing.
• 30:36
  SPEAKER_00: You know these movies about these guys on 30-meter high waves.
• 30:40
  SPEAKER_00: That's what you got when you were in Poland.
• 30:43
  SPEAKER_00: But I do think Poland is more well known now.
• 30:47
  SPEAKER_00: Uh, it has it has grown into uh there's still a lot of growth in there, I think, but there I find less opportunities.
• 30:55
  SPEAKER_00: Um I found more in Australia.
• 30:59
  SPEAKER_00: Um, one of the reasons also is if if you go for multi-bagger or hundred bagger hunting, um most hundred baggers they come from venture capitalists because they can buy a company when it's like two or three million market cap, and then they can ride it for a certain time, like five, six, seven years, and then they sell it.
• 31:24
  SPEAKER_00: Um, but of course, these are not public companies um uh at the moment, and the IPO market is a lot slower than it was before.
• 31:35
  SPEAKER_00: Um, I think when you look at like Core Weave or other companies that went public, usually these companies are are already a couple of billion dollars in market cap.
• 31:46
  SPEAKER_00: You find less companies that go public, like 300, 400, 500 million with high potential.
• 31:53
  SPEAKER_00: And the reason is because the venture capital market in the US is extremely well developed, it's like a mature market.
• 32:02
  SPEAKER_00: Now, there are countries where the venture capital market is less developed.
• 32:07
  SPEAKER_00: For example, Canada is a company like that, and Australia is the same.
• 32:12
  SPEAKER_00: And what happens is there are a lot more small companies that go public in these countries than in the US, and that's why I, for example, look at um at Australia and Canada because sometimes opportunities arrive because yeah, they have a less developed uh venture capital market, so there is a logic behind the looking for the right hunting ground.
• 32:39
  SPEAKER_01: Yeah, and I can imagine it also provides some extra advantages, like you said, perhaps lower valuation, less eyeballs on the companies, uh which can be beneficial for one and a disadvantage for others, and perhaps any other advantages.
• 32:56
  SPEAKER_00: Yeah, that was that I forgot to mention that, but it's true that um you're hunting in a space where few others go to hunt, uh, especially not professional investors.
• 33:08
  SPEAKER_00: I do know some professional investors who go there, but they run a smaller fund because um if once you have like one billion dollar under management, you can't buy these companies, you you would need to buy the company whole, you can't buy a piece of it uh because the the liquidity is just not uh sufficient.
• 33:27
  SPEAKER_00: Um so that's one thing.
• 33:31
  SPEAKER_00: And um yeah, the other thing is of course the sectors.
• 33:36
  SPEAKER_00: So when you look in the past, um multi-backers need like a sector that allows for um massive scaling without needing a lot of capex, uh so asset light fast growers.
• 33:52
  SPEAKER_00: Um, and yeah, we saw them of course in uh tech and it.
• 33:56
  SPEAKER_00: Uh but the most most of them come from uh tech and it, healthcare, some of the financials and industrials that are the big parts.
• 34:07
  SPEAKER_00: And so, for example, for me, my favorite sector is just like constellation software does.
• 34:12
  SPEAKER_00: I look for vertically vertical um uh software markets uh companies because usually these kind of companies they have a pretty high um or they dominate or they have a good penetration in like a very profitable niche market, and then you need to assess okay, but how how big how big can it become?
• 34:38
  SPEAKER_00: Um and and yeah, it's it's like the the Constellation software playbook, but you try to implement it yourself.
• 34:46
  SPEAKER_00: The only big disadvantage we have as uh public investors is when Constellation buys a company, it knows that it will be able to improve and increase the margins because they become activist investors.
• 35:01
  SPEAKER_00: Although they use a decentralized management approach, they will come in, use all their previous operating experience, and improve the company.
• 35:10
  SPEAKER_00: That's the only thing we cannot do as a public investor.
• 35:13
  SPEAKER_01: Alright.
• 35:14
  SPEAKER_01: I would like to bring the theory into practice.
• 35:18
  SPEAKER_01: Perhaps you can walk us through a case study, a company that checked all your boxes, how you found it, uh, what stood out, and uh yeah, maybe any recent names you could share.
• 35:31
  SPEAKER_00: Yeah, sure.
• 35:32
  SPEAKER_00: I I will talk about my number one position that I hold.
• 35:36
  SPEAKER_00: So, of course, um for everybody who's listening, I am extremely biased, but I will tell the story how I found the company and what I like about it.
• 35:45
  SPEAKER_00: So I came onto this company by um reading an article written by a Czech investor.
• 35:55
  SPEAKER_00: His name is Jakub Kreutzman, he's a very talented investor, but it was written in Czech, so nobody really knew about him.
• 36:04
  SPEAKER_00: Uh, of course, with Google Translate, you can you can read everything in English.
• 36:07
  SPEAKER_00: I I don't I speak a lot of languages, but I don't speak Czech.
• 36:11
  SPEAKER_00: Um and it's through him that I found a company, and so the company is called FarmX Technologies.
• 36:18
  SPEAKER_00: Um, the ticker is is PHX, uh, and it's it's uh traded on the Australian Stock Exchange.
• 36:26
  SPEAKER_00: The basic thesis is the following.
• 36:30
  SPEAKER_00: In um Australia and New Zealand, there are 7,000 pharmacies, and you know this probably if you go to a pharmacy and you order a medicine or a product and it's not in stock, then they will go to this computer system pharmacist, and they will order it and they will say, come back later in the day, or come back tomorrow, and you can come pick up uh your medicine.
• 36:51
  SPEAKER_00: And so you have 7,000 pharmacies like this, and they are supplied by about 200, between two and 300 suppliers now.
• 37:01
  SPEAKER_00: And this means that there is uh money, transactional money flowing over a gateway, about 20 billion Australian dollars each year in transaction because people pay for medicines, etc.
• 37:14
  SPEAKER_00: And this gateway that standardizes the information is owned by Pharmax Technologies, so basically, they have a monopoly on the network.
• 37:26
  SPEAKER_00: And you can compare this to like a company for Adian, you have a you have a flow of money, and then they take a small percentage, their take rate.
• 37:34
  SPEAKER_00: And it's the same thing here for Pharmax Technologies.
• 37:37
  SPEAKER_00: You have 20 billion Australian dollars flowing over the gateway, and they by my calculations they take 0.035%.
• 37:46
  SPEAKER_00: Now, for somebody who knows about payment processors or about take rates, that's an extremely low take rate.
• 37:53
  SPEAKER_00: It's like it's almost nothing.
• 37:55
  SPEAKER_00: Now, the reason why it's so low is because the gateway was developed more like a back office or a structural with a structural intent, it was never uh developed in the past as a goal to make money out of it.
• 38:15
  SPEAKER_00: Um the reason why it's uh just to add the little backstory in the past in Australia you had three companies that uh sold point of sale systems to pharmacies, three competitors, but this also means that each point of sale system needed its own backbone software infrastructure which communicated with the different suppliers they had.
• 38:38
  SPEAKER_00: So at a certain moment it was very inefficient and a complete pain in the ass.
• 38:43
  SPEAKER_00: So they the three companies came together and they said, Let's build a gateway.
• 38:48
  SPEAKER_00: So that's what they did, and that's where FarmX was born.
• 38:52
  SPEAKER_00: But it was not considered like a competitive advantage or something, it was just needed to run their main business, and their main business was selling point of sale systems.
• 39:03
  SPEAKER_00: Now there has been a very messy past, there are some lawsuits, um, one uh one of the three companies bought the other one, and in the end, in 2000, I think, 22-23, FarmX with the gateway is all that remained.
• 39:21
  SPEAKER_00: So they divested the previous business, so all the bad business was now out of the company.
• 39:29
  SPEAKER_00: The board attracted new management, and so new management came in.
• 39:33
  SPEAKER_00: New management recognized uh the importance of the gateway, and so they are now reinvesting in the gateway to make it grow.
• 39:43
  SPEAKER_00: And we talked uh before about ambition.
• 39:46
  SPEAKER_00: So for the moment, this is a very, very small company, it's uh 50 million Australian dollars in market cap.
• 39:53
  SPEAKER_00: I think their last revenue was like 7 million or something, 7 million per year.
• 40:00
  SPEAKER_00: And just to because we talked about ambition and vision in the future, the new management, when they presented where they wanted to go, recognizing the the value of the gateway, they said, Well, we're doing 7 million now, we think we can go to 300.
• 40:17
  SPEAKER_00: I mean, I mean, and did the guy who told this, this is not like a flashy salesman, uh super cocky person.
• 40:26
  SPEAKER_00: He he looks like a very decent normal person, and he he he explained this very rationally.
• 40:33
  SPEAKER_00: And so when I when I saw this opportunity, and the opportunity exists because of the bad past of the company, uh that's why I I invested in the company.
• 40:43
  SPEAKER_00: Now, of course, I'm giving you the the short pitch, there's a lot that came into this, um, but that's that's an example of when you look at the life cycle of a company, this company was in stage six in decline, but because of the structural turnaround, it's now gone back all to the left to the fast growth.
• 41:07
  SPEAKER_00: And so when we talked in in the last time when we talked about where do these companies uh show up, these kind of fast growth companies.
• 41:17
  SPEAKER_00: We talked about an IPO, um, okay, but this is one of the other ways that this kind of companies can come together, is when they travel around in the life cycle and they go from decline back to fast growth.
• 41:32
  SPEAKER_01: Yeah, I just did some um some quick maths to see what that what they would need to do.
• 41:39
  SPEAKER_01: If they truly have the monopoly and pricing power, that would mean they need uh a take rate of about 1.5%, which I mean PayPal has a transaction uh uh fee of like two and a half to four percent, so even that is not that high, and I can imagine they can leverage other revenue streams besides the take rate, perhaps.
• 42:04
  SPEAKER_01: So um I'll definitely write this one down myself and take a closer look, and uh yes, let's see uh where it takes us.
• 42:12
  SPEAKER_00: Yeah, just bear in mind that um in a year it doubled.
• 42:18
  SPEAKER_00: So when you look at the price now, a lot of growth is priced in.
• 42:23
  SPEAKER_00: But my bet is it will it will keep on growing, and because I think it has the monopoly, I can think they can keep on growing for a long time.
• 42:32
  SPEAKER_00: Yeah, so um because uh to make to yeah, to make the link with the discussion we had before on valuation, when you look at pure valuation, you're gonna say, hmm, it looks expensive.
• 42:44
  SPEAKER_00: But if you have a company that has a monopoly, then the duration will be long, and then uh a traditional model will will not show this.
• 42:54
  SPEAKER_01: Yeah, you would need to model for like 20 years, and the amount of uncertainty within 20 years is so massive that it's almost undoable.
• 43:02
  SPEAKER_01: But if it can grow 20 or 50 percent for 20 years, then the valuation really doesn't matter.
• 43:08
  SPEAKER_01: Uh you're right.
• 43:09
  SPEAKER_00: Yes, and for and and yeah, maybe the last thing is they're developing new products.
• 43:13
  SPEAKER_00: So there's like we talked about hidden optionality also, there is optionality within the company because the new management is actively looking for new business ventures, which was not the case uh a couple of years ago.
• 43:28
  SPEAKER_01: So So, how do how long do you typically hold a position?
• 43:32
  SPEAKER_00: It depends.
• 43:34
  SPEAKER_00: What I do is when I buy, um I talked about like uh writing down on one page and then in one paragraph, in that one page, I will write down how long I would like to hold a company.
• 43:47
  SPEAKER_00: And this can range from three years to ten years plus, so it depends uh on the type of company.
• 43:55
  SPEAKER_00: Yeah, it's it's it's really dependent on the type of investment because you can find opportunities.
• 44:00
  SPEAKER_00: Opportunities, like, for example, if you find like a special situation or uh or an arbitrage opportunity, usually um you already know when it will be resolved because there's there might be like a date um that has been fixed somewhere, and then you you write down okay it's two years for a high-quality company like Adian, for example.
• 44:22
  SPEAKER_00: I just wrote down 10 plus, and from now from now on, it's just monitoring the strength of the company.
• 44:29
  SPEAKER_00: I don't have to do much.
• 44:31
  SPEAKER_00: I I'm maybe in five years something happens, some some big disaster for the company, I don't know.
• 44:39
  SPEAKER_00: Uh, and and maybe because of that, I'll sell the company.
• 44:42
  SPEAKER_00: It's it's difficult to say.
• 44:44
  SPEAKER_00: Um, but I will do everything I can to ignore valuation for this company, and as long as the company is getting stronger, and very specifically stronger than the others, uh, because they're still doing something that other payment processors cannot do or do less well, then for me it's okay.
• 45:07
  SPEAKER_01: Interesting.
• 45:08
  SPEAKER_01: So I imagine you're the type of investor that perhaps doesn't very diversify as in the amount of companies you hold, but are more concentrated?
• 45:20
  SPEAKER_00: Yes.
• 45:20
  SPEAKER_00: I have I think 12 or 13 companies in portfolio.
• 45:27
  SPEAKER_00: I probably would never go beyond 15 because it's it's a bandwidth problem.
• 45:33
  SPEAKER_00: I have for myself, I find it difficult to keep track in detail for 15 companies, and in addition, on top of that, searching for better opportunities, it's my limit.
• 45:48
  SPEAKER_00: Maybe some people have 20-25 companies and they have no problem with that.
• 45:52
  SPEAKER_00: That's fine.
• 45:53
  SPEAKER_00: I I also think that research also proves that beyond 15 you don't need a lot more diversification.
• 46:01
  SPEAKER_00: Now, of course, I do take positions up to 15% in costs, and if they grow, then they can become 20, 25, 30% of the portfolio.
• 46:14
  SPEAKER_00: And then what I do is I would I would never outright sell.
• 46:18
  SPEAKER_00: I I would avoid out outright selling anything.
• 46:21
  SPEAKER_00: Maybe I would trim, but yeah, you need you need to lead you need to let your winners ride, so so I'm I'm very careful with that.
• 46:29
  SPEAKER_01: Before we end this, may I say um excellent episode?
• 46:34
  SPEAKER_01: I would love to end something with something our listeners can uh use or uh walk away with.
• 46:41
  SPEAKER_01: If someone wanted to start building their own checklist, their own process on finding these compounders, uh, what you're doing, how should they start?
• 46:52
  SPEAKER_01: Where should they begin?
• 46:53
  SPEAKER_00: Well, imagine that uh you're interested in business, because I want to emphasize this.
• 47:00
  SPEAKER_00: I have friends who talk to me and they say the time you're spending on companies and that all the hours and hours you're researching, I I just can't do it.
• 47:11
  SPEAKER_00: I mean, I don't have the time, I have a job, uh, it's it's too difficult.
• 47:16
  SPEAKER_00: And then usually I say, look, listen, if you're not deeply interested in like discovering or understanding businesses, then just buy an index fund and let it rip for 20-25 years and don't look back, and and maybe change your allocation when you're closer to your pension to avoid a bit of risk.
• 47:34
  SPEAKER_00: But um I think but on the other hand, if you're interested, if you have interest in understanding companies, if you if you find some joy in like I don't know, maybe you love iPhones and you want to understand what what the company Apple is, um then you can build a stock portfolio.
• 47:55
  SPEAKER_00: And I would recommend then to start reading investing books, but you will quickly see that imagine that you start reading, and then after a couple of years, um, you've read like 20, 30, or 40 books or more.
• 48:11
  SPEAKER_00: I do feel for myself there is like um a diminishing return because all these books they iterate on the same topics all the time, and the best advice I can then give is to start uh to read uh annual reports because it's through annual reports that you get to know the different kinds of business models and the different kinds of business businesses that exist, and for me that was the biggest um once I started doing that, uh I started seeing myself improving as an investor.
• 48:50
  SPEAKER_01: Yeah, I think that's uh that's a that's an excellent tip, and of course I'm biased, but reading uh Kevin's newsletter, listening to our podcast is also a great way, of course.
• 49:00
  SPEAKER_01: But yeah, um I get what you're saying.
• 49:02
  SPEAKER_01: I I think writing down actionable advice and just things that stand out to you, and just writing them down creates like a like a snapshot in your brain, and you it's a it's it becomes way more ingrained into your persona into you into uh into what kind of style and investor you are.
• 49:25
  SPEAKER_01: And I think 99% of people should just buy an index fund and do it every every few months and forget about it.
• 49:36
  SPEAKER_01: For the one percent that is interested in finding these businesses, understanding them, finding potential compounders, um, definitely check out Kevin's Substack.
• 49:47
  SPEAKER_01: Uh, perhaps before we end, just to plug where can people find you?
• 49:52
  SPEAKER_01: Uh, where can they learn more?
• 49:54
  SPEAKER_01: And uh yeah, sure.
• 49:55
  SPEAKER_00: So my uh newsletter is called 100baggerhunting.com.
• 50:00
  SPEAKER_00: Uh so you can find all my my articles over there.
• 50:04
  SPEAKER_00: And um I'm also active on Twitter or X.
• 50:08
  SPEAKER_00: Um, my handle is 100baggerhunt.
• 50:12
  SPEAKER_00: Um, it's the similar content, but more uh shorter, of course.
• 50:17
  SPEAKER_00: Um, so yeah, that's where people can find me.
• 50:20
  SPEAKER_01: Yeah, just like the other episode, we'll make sure to embed that in the description.
• 50:25
  SPEAKER_01: I really enjoyed this two-part series talking to you.
• 50:29
  SPEAKER_01: Uh I learned a few new things, a few new insights, and uh we appreciate it a lot.
• 50:35
  SPEAKER_01: And hopefully it's not the last time we'll talk.
• 50:37
  SPEAKER_01: Perhaps there's more for us in the future.
• 50:39
  SPEAKER_00: Yeah, sure thing, and thanks a lot for inviting me.
• 50:41
  SPEAKER_00: Thank you.
• 50:42
  SPEAKER_01: No worries, thank you, thank you.