[00:01:39] Clay Finck: You’ve been influenced by investors like Terry Smith, Tom Gayner, who we’ll be chatting about today, and Guy Spear. So to help frame this conversation, how about we just start with defining what the term quality investor means to you? 

[00:01:53] Christian Billinger: That’s a great question. I think in a way, quality investing is like any other type of investing in the real sense of the word, as in you’re trying to pay less than what you’re getting.

[00:02:03] Christian Billinger: So for me, it’s more a question of, it’s almost more a risk management framework than that sort of distinguishes quality investing for me. And of course, the types of businesses that you end up looking at. But I think the way I approach it is that quality investing for me means that I’m looking to generate most of my performance.

[00:02:22] Christian Billinger: The underlying performance of the businesses that I’m invested in as opposed to the buying and the selling of securities. So I think in one sense that makes quality investing different from many other types or schools or philosophies of investing where you’re looking to buy something cheap. And once you’ve hopefully seen a re-rating, you try and sell it at a much higher sort of rating.

[00:02:41] Christian Billinger: And then you repeat that. Ideally, I want to buy these businesses at a fair. Better valuation, but most of the returns I anticipate to come from operating performance. So that’s how I approach it. 

[00:02:55] Clay Finck: So did you develop this sort of approach? I know we’re also going to be talking about your experience with institutions.

[00:03:01] Clay Finck: So did you develop this sort of approach from the beginning and it fit your style or was it something that was learned over time? 

[00:03:08] Christian Billinger: I think it’s a bit of both. I always feel that. If you want to have an investment philosophy and style that you’re able to stick to over long periods of time, it needs to be something that comes naturally that suits your temperament your interests, and your personality more broadly.

[00:03:22] Christian Billinger: So I think it certainly fits my personality and way of thinking about the world. But I think it’s also based on having seen. what works for other investors and what works for me or what has worked for me historically, and equally what hasn’t worked so well. I think I’ve had the most success early on in my career with owning good businesses.

[00:03:41] Christian Billinger: And there are other ways of generating very healthy returns over long timeframes, but I just find that quality investing is perhaps the most replicable and robust and reliable way of doing it. And I think I’ve seen more people achieve very good long-term returns. through what I, what we call quality investing that have in most other sort of disciplines.

[00:04:01] Christian Billinger: I do think that the upside or potential upside is probably, you can probably generate higher returns on the upside with some other ways of investing, but I’m so focused on capital preservation first and foremost, and then secondly, the upside. So I think it just suits our structure and my temperament and generally my outlook on life.

[00:04:20] Clay Finck: Oftentimes when I think about quality investing, I think about. Chuck Awkery’s three-legged stool where you have quality management, great business, and great business being something that has high returns on capital, and then a runway to reinvest those earnings and have a runway for growth. So I wanted to tap into the ability to reinvest and that runway for growth.

[00:04:41] Clay Finck: In the best-case scenario, a business is able to reinvest 100 percent of its cash flows at a high rate of return. But of course, we don’t live in a perfect world and it can be pretty difficult to find these businesses and be comfortable with them. So I’m curious if you could talk about the reinvestment rate a bit and what sort of reinvestment rate you look for.

[00:05:01] Clay Finck: If there’s a threshold, maybe there’s a lower end for companies that you own today. 

[00:05:06] Christian Billinger: Yeah, that’s a very important question with the reinvestment piece. So one I think important aspect of that is, I think we often talk about reinvestment in terms of the cash flow statements. So in terms of the cap, you might look at CAPEX in relation to operating cash flows, for instance, what percentage of operating cash flows go back into maintenance and growth.

[00:05:25] Christian Billinger: Especially growth CapEx. And I think that is an important aspect of reinvestment, but I think equally, I think what’s often perhaps not emphasized enough is the income statement, the reinvestment that’s reflected in the income statement. So as in, before you get to the operating cash flow, so there’s a number of OPEX lines for any business, right?

[00:05:43] Christian Billinger: And so much of the reinvestment happens there before you even get. to the CapEx line, if you will, in the cash flow statement. So I think that’s really important to keep in mind because it’s also less visible. So we like to invest in companies that are often family-controlled because they have what Tom Russo refers to as the capacity to suffer and the capacity to reinvest.

[00:06:02] Christian Billinger: And much of that happens in the income statement. So it may be a case of investing in product development or. R& D or marketing or brand building or any of these things and of course, much of that in some cases, it depends on your accounting treatments, whether you capitalize or not, but often that goes through the income statement.

[00:06:22] Christian Billinger: So I think that’s an important aspect of it. We don’t have a hard number in terms of is it 50 percent reinvestment or 70 or 30 or but we like to see businesses that ideally can reinvest at a high rate. But having said that, we also own a few. Companies that have seemingly very little reinvestment. So if you look at a company like Kona, or if you look at a company like Coloplast their reinvestment rates are very low.

[00:06:45] Christian Billinger: So their dividend payout ratios are often close to 100%. And that’s simply because they can grow top-line and earnings without reinvesting. So in a way, that’s the ideal situation, isn’t it? When you can grow earnings, but you’re not having to deploy additional capital. So that means they can return plenty of cash to us.

[00:07:03] Christian Billinger: as shareholders, but they can also grow the intrinsic value of the business. So I think there’s all these sorts of nuances. I agree with the general notion that reinvestment is assuming you’re generating returns in excess of the hurdle rate, which we would often consider to be 10 percent or well over 10%.

[00:07:18] Christian Billinger: Then yes, we want to see high reinvestment rates, but there are so many other dimensions to it. So I think for us to, the important thing is to see businesses that can grow, whether they require. Lots of additional capital are not. 

[00:07:30] Clay Finck: I think that is a good point, where you mentioned understanding what’s flowing through the income statement, rather than just looking at the cash flow statement.

[00:07:37] Clay Finck: Yeah, I think that’s a really good point. I wanted to also tap into assessing a runway because if you’re making some sort of estimate of where a company’s heading in the future. You need to assess how long they’re going to be able to reinvest and what their market size is and how much they’re going to be able to tap into that.

[00:07:55] Clay Finck: So could you talk more about how you assess the runway of a business? 

[00:08:00] Christian Billinger: I think partly or largely because of the kind of industries and companies we’re invested in, it’s clearly has become very fashionable in recent years to talk about the total addressable market. And I think they’re important concepts especially for some types of businesses and certainly in industries where that are highly fragmented.

[00:08:14] Christian Billinger: So you may be looking at a very large total addressable market and the argument would often be, look, there’s all these great businesses that have a sort of minute share of that market. So look at the growth runway. I think that’s valid for some types of businesses. I think for the kind of. Kinds of industries and businesses were invested in.

[00:08:30] Christian Billinger: It’s often less productive use of time, partly because the market share dynamics are so stable and the growth rates of these markets. So if you take elevators and escalators, or if you take spirits, or if you take industrial gases, these are industries were invested in. And usually we have a pretty good idea of what the Long-term growth rate has been historically and what we think will make some sort of guess about the future.

[00:08:53] Christian Billinger: We don’t necessarily rely much on forecasts, but you need to have some idea whether it’s a 3 or a 5 or 7 percent growth business. So I think we tend to look at the market growth rate and whether we think a business can or should grow a bit faster or slower than that. I think we tend to spend less time on the sort of total addressable market also because it’s so difficult to estimate, right?

[00:09:15] Christian Billinger: If you’re looking 5 or 10 years ahead. So there’s some of the things that I would look at when I try to determine the potential long term sort of growth runway for a business. But I think in essence, I agree with you that Whichever method you use to get to some estimate of the growth rate, sustainable growth rate, it’s that’s clearly one of the key variables and probably the key variable we look at.

[00:09:34] Christian Billinger: You would look at the historical growth rate of the industry, of course, and then you’re trying to argue for either why should we be growing a bit faster or slower going forward? How does it compare to peers? You might look at. The usual sort of breakdown of volumes and pricing and premiumization and market share gains and losses.

[00:09:52] Christian Billinger: But yeah, I think in a way we choose to look at companies where it’s easier to take a view on these things if that makes sense. It’s the idea of the two hard pile it’s easier, I think, to estimate the growth rate for the elevator and escalator industry or for the. industrial gases industry than for many of many other more exciting industries.

[00:10:10] Clay Finck: So you do put a high level of emphasis on business quality, but you’re not going to overlook the quality of a management team as well. And skin in the game or high insider ownership is something that many investors look for in a management team. When I was preparing for this interview, one quote you had stuck out to me.

[00:10:27] Clay Finck: You said, the soul in the game is more important than skin in the game. So I’d love for you to expand on this and talk about what you meant by soul in the game being more important than skin in the game. 

[00:10:39] Christian Billinger: Yeah, I think it’s an expression that I first heard or read in one of Nassim Taleb’s books. And to me, skin in the game is really about financial incentives.

[00:10:48] Christian Billinger: So whether it’s equity ownership or options or bonuses or whatever you can think of. So soul in the game to me is about, and as it relates to investing in business, is about taking pride in what you do and doing things the right way. Even if it’s at the expense of short-term reported earnings or short-term shareholder returns or any of these metrics.

[00:11:09] Christian Billinger: And often there’s overlap, right? So if you look at a couple of our holdings, Alvea Mage, you look at Bernard Arnault he clearly has enormous skin in the game, right? In terms of his equity in the business, he also has a soul in the game. And if I look at Markel. And I look at Tom Gaynor, he’s got very meaningful financial exposure to Markel.

[00:11:30] Christian Billinger: He’s clearly got skin in the game, but just like in the case of Valvium Age, he’s also got soul in the game, right? So he cares about doing things the right way, building for the long term, operating with great integrity. And the reason we find that it’s so important is because it’s the right kind of motivation, right?

[00:11:47] Christian Billinger: If you’re a long-term investor, you want to be invested with people who care about building for the long term. One of our other holdings, LMS is another great example of soul in the game, the family, the sort of controlling shareholder. or main shareholder in the form of the Dumas family, they really have a soul in the game.

[00:12:04] Christian Billinger: So they will do things that in the short term may seem suboptimal, right? They will pull products off the shelves. If they’re they’d be known to do this in some cases, products that are doing too well may come off the shelves, or they will restrict the supply of certain products. They may spend money in terms of product quality.

[00:12:21] Christian Billinger: They may spend money on aspects of the product that may not even be visible to the end user. or customer, but that’s part of their DNA and what’s doing things the right way. So I think it’s hugely important. Yeah. And I think we’re lucky to have most of our portfolio companies. I think we see this all in the game now in some like the Agile or Nestle, where you’re dealing with professionally hired managers.

[00:12:43] Christian Billinger: So you could argue that’s a different situation, but I feel that we’ve found companies that are professionally managed. By people who really care about the business and have a, who have a sense of purpose. So I think even in those types of companies, you can find people who have soul in the game.

[00:12:58] Clay Finck: Yeah, that makes sense. You mentioned the family owners and having that soul in the game where it’s much more than just showing up and getting a paycheck. What are some of the key signs that you look for to recognize that quality outside of something being family-controlled? What are some of the key things you look for there?

[00:13:17] Christian Billinger: I think it’s mainly looking at the way people behave. It sounds obvious, but I think of course, many companies will tell you about their culture and their right, their way of doing things. And I think you need to spend a lot of time with or looking at a business to really get a sense of, is this real?

[00:13:33] Christian Billinger: Is this sort of, is this the way people live the sort of ethos of. what they’re telling us. So with a company like Markel, I think it’s pretty clear to anyone who spends some time looking at the business and meeting with current and former members of this sort of management team. And that is what you get.

[00:13:51] Christian Billinger: Some of the things we look for might be the way they communicate. Or rather don’t communicate with markets. So in many cases, I think we tend to like businesses that aren’t overly focused on communicating with markets on a regular basis. Clearly, that does suggest that these are people who are focused on the right thing, which is running their business.

[00:14:10] Christian Billinger: And obviously you want them to be consistent about that. You see the same type and frequency of communication when things are, when times are good as good or bad. So that’s one of the things we look for, but I think it’s mainly just spending a lot of time speaking to people inside the business, people who have been inside the business at senior levels.

[00:14:29] Christian Billinger: I think it’s clear to anyone that spends a bit of time around companies like LVMH or Markel, or they have that sort of DNA. 

[00:14:37] Clay Finck: You mentioned the. Family-controlled aspect to the business. And this is quite an interesting concept. I was recently chatting with an entrepreneur on a trip. And he was telling me a story of building up this tech company, taking it public, taking on outside investors.

[00:14:52] Clay Finck: And essentially his company was hijacked from them. And these outside investors just have a huge influence on the company and now he’s essentially left there and he’s not a part of it. And it’s interesting to think about how there are these public companies that family controlled, yet they’re still able to operate as a family business and have that long-term approach and ignore the interests of Wall Street and such.

[00:15:16] Clay Finck: So can you talk more about the importance of this and how it’s something that’s still able to play out in public markets? 

[00:15:23] Christian Billinger: Yeah, I know it’s a very interesting point. And actually, in some cases, if you look at a Markel, for instance, Tom isn’t even, he’s not a member of the Markel family, right? But I think people, when, if you spend a bit of time listening to him and observing him, you feel like you almost come away thinking he is part of the family, right?

[00:15:40] Christian Billinger: Because of the way he behaves and communicates. And so you have, I think in some cases with public companies, if you have the right people running it, they will operate like family businesses, even if there is no family controlling family shareholder. So you can Nominally, they’re not family businesses, but if in terms of the substance, they operate as a family business.

[00:15:58] Christian Billinger: One of the things that I like about family businesses is that they take the very long-term view. So they are usually not always, but usually looking at the next 50 or 100 years or beyond or probably more likely they have no time horizon, right? They just want to preserve this for the next generation who will then preserve this for the next generation.

[00:16:17] Christian Billinger: And I think they, they tend to be very good risk managers. So if like us, you are quite focused on downside protection or capital preservation first, family controlled businesses tend to take. Once again, there are exceptions, but I think generally they take a more prudent approach to investing up front, the way they manage the balance sheets, all kinds of things, right?

[00:16:35] Christian Billinger: Reputational risk. So I think in those, they’re two important aspects of why we like them. And then I think a third reason is that we are attracted to industries where there tend to be a lot of family controlled businesses. So if you take spirits, for instance, a large number, the majority of the listed company in that space will be family-controlled.

[00:16:52] Christian Billinger: And I think it’s usually a reflection of the fact that. These are businesses that haven’t required significant capital injections over time. So the families haven’t been diluted. They’ve been able to maintain control of the business. So it’s also a good sign or a good indication of a very attractive industry and business model where you see a company where the family’s been able to maintain their control and influence over in some cases over hundreds of years, right?

[00:17:17] Christian Billinger: Because it suggests that the business is generating sufficient cash flow on an ongoing basis. Not to require any external capital. Yeah, we find there’s a lot of, there are lots of reasons to like these family controlled businesses. Of course, there are risks inherent. In the family business sort of structure, I guess management governance or management would be the key one.

[00:17:37] Christian Billinger: So it’s certainly, it’s not sufficient. It’s perhaps not even necessary, but it’s usually a good place to be looking. I find. 

[00:17:45] Clay Finck: And another thing that I’ve gained more of an appreciation for is looking at the compensation structure. If you find a lot of people who they seem to be maybe not as compensated as well as they could be elsewhere they have the option to go make money somewhere else.

[00:17:59] Clay Finck: So that’s a. a key sign where there’s something there where they’re in that position for much more than just to get the paycheck. 

[00:18:07] Christian Billinger: Yeah, I think that goes back to the soul in the game discussion, doesn’t it? You’d like to think that if there’s more financial upside somewhere else and people choose not to, then presumably it’s because they want to be doing this, right?

[00:18:18] Christian Billinger: They enjoy doing this. And I could imagine we were talking about Tom Gaynor. I would imagine he would do it for a lot less, right? He would do it, I think, regardless almost what he’s getting paid. So you do want to find those types of people. Now, of course, if you’re looking at a Nestle or a Diageo or some of these large listed businesses with open shareholder structures, of course, you will be relying on a management team that has various types of financial incentive packages in place.

[00:18:43] Christian Billinger: And that’s just the nature of it. But as a sort of, as a basis for a portfolio or as a sort of foundation for a portfolio, I find that family-controlled businesses can be a great sort of place to be looking. 

[00:18:54] Clay Finck: There’s a saying in investing that if you’ve removed the downside, then all that’s left is the upside.

[00:18:59] Clay Finck: And you yourself, you put a big focus on removing the downside, and it’s what you’re really looking to do before you start digging in and looking at the potential upside of a business. Can you talk more about how you came to appreciate this? Because it seems that… If you put so much focus on removing the downside, then in some ways you might be limiting the potential upside.

[00:19:22] Christian Billinger: Yeah, and I think that’s true, by the way. I think you probably are giving, not giving some of the upside away, but you probably are reducing your potential upside by doing that, right? Inevitably, if you are very focused on downside protection, you will probably end up in the types of businesses where the upside may be less than in some other cases.

[00:19:40] Christian Billinger: Now, it suits us well because of the structure we operate. temperament, personality, the sort of goals and ambitions we have with, but of course if you want to be at the sort of top of the league tables on an annual basis, then that’s a very different story. I think if you’re as focused on downside protection as we are, then you are very unlikely to be anywhere near the top of those tables.

[00:20:00] Christian Billinger: And that’s perfectly fine. In fact, if we ever were, I’d be slightly concerned because that would suggest we were invested in the types of businesses we don’t want to be invested in. So I think you’re right. You probably do give away some of the upside. I think once again, the reason we. have that focus is partly the structure.

[00:20:15] Christian Billinger: It’s partly a personality thing, and it’s partly the idea of looking at what works and then doing it and looking at what doesn’t work and trying to eliminate or reduce those activities. And I’ve just seen so many examples of people who seem to do well over long timeframes. by reducing their downside and the idea of focusing on not doing anything obviously stupid, as opposed to trying to be very smart about things.

[00:20:39] Christian Billinger: So we don’t want to operate a strategy where we rely on being smart or having these incredible original insights. So for us, it’s more consistently applying what we think is common sense. in investing. I think that’s probably there’s obviously a more sort of philosophical foundation for this, which goes back to downside protection that is, which goes once again, goes back to the kinds of ideas that Nassim Taleb discusses so well.

[00:21:05] Christian Billinger: So the idea of via negativa and removing bad things and excess interventionism, et cetera. But I think in a practical sense, it just seems to work and it suits me and us. So that’s how we’ve ended up there. And actually I should, sorry, I should add we look at that both. at the company level and at the portfolio level.

[00:21:24] Christian Billinger: So downside protection, we’re looking for layer after layer of it. So it’s a good starting point. If you can invest in good businesses with good balance sheets and robust or resilient business models, it’s nice if you can also diversify and you can avoid leverage and make sure you have liquidity.

[00:21:40] Christian Billinger: So there’s all these sort of layers to downside protection that I think really can add up to a pretty robust portfolio. 

[00:21:48] Clay Finck: I was taking a look at your portfolio and you have 20 holdings shown on your site. And you’ve stated that there are roughly 50 companies in your investable universe that you’ve narrowed it down to.

[00:21:58] Clay Finck: And that’s something that’s grown over time. What are some of the primary factors you see when you’re comparing your current portfolio to what’s in your investable universe? 

[00:22:09] Christian Billinger: One of them would typically be that some of these companies we just haven’t known for long enough. So we don’t feel we understand them well enough.

[00:22:16] Christian Billinger: They may very well be great businesses trading at reasonable valuations, but we would like more time to understand them. So that would be one reason. Another reason would be if we already have high exposure to an industry. So spirits is one example where in the past, there were a few companies that I’d quite happily own in the spirits sort of space, but we already have three holdings there and they represent maybe 20 percent of our portfolio.

[00:22:38] Christian Billinger: So we feel I don’t necessarily look at things from a top-down point of view, generally speaking, but of course, you have to manage or call it factor exposures or your sort of concentration risk. So that would be another reason that I mean, they would probably be the two most common reasons. Then there’s a valuation aspect.

[00:22:55] Christian Billinger: We may have a business on that investable universe that we know well enough. We think it’s a great business and it works from a portfolio point of view, but the valuation is excessive and it needs to be obviously excessive. So usually if something, even if something’s trading at a fair valuation, we would probably be buying into it.

[00:23:13] Christian Billinger: But if something is trading at very high multiples or a very sort of high valuation compared to what we think it’s worth, then obviously we wait and hope for a better opportunity. Now, sometimes that never materializes, which is perfectly fine. There are so many other companies to be looking at. And we feel we already have 20 great businesses in the portfolio.

[00:23:32] Christian Billinger: So they’re probably the key reasons we wouldn’t, that something would be in the investable universe, but not in the portfolio.

[00:23:43] Clay Finck: High rates of return, the returns of the business ideally are somewhat close or match the returns of the portfolio. What do you define as sustainably high and is that something that changes over time? 

[00:23:55] Christian Billinger: So the reason we well business is that generates sustainably high returns it that comes back to. What we talked about initially, this idea that you want to be, or we want to be earning returns that reflect the performance of the underlying business.

[00:24:08] Christian Billinger: And that will only be the case over very long timeframes. So that’s why we need that sustainability or durability when it comes to returns. Once again, we don’t necessarily have a sort of hard number, but Generally speaking, we’re looking for something in excessive and hopefully well in excess of 10%.

[00:24:25] Christian Billinger: It’s not a very original number, but it, I think it is a good hurdle, generally speaking, for the types of businesses we’re looking at. And so we find there are a number of very good medium to large-size listed businesses that will meet that requirement, both in terms of the level of returns and the duration of returns.

[00:24:42] Christian Billinger: So that’s how we think about it. And I think the duration piece is very important because there is so much emphasis on the level of returns, especially over one and three and a five-year time frame. But I think the duration to come back to Markel, for instance, if you look at, yes, 14 or 15 percent is a phenomenal rate of return.

[00:25:00] Christian Billinger: But I think the even more important aspect of that is the duration. If you do it Like in Tom’s case for 30 or 35 years or whatever it is now, you get incredible outcomes, right? And you don’t need to go as far out on the sort of risk curve either. So I think for us, the duration side of the equation is probably more important than for many.

[00:25:20] Christian Billinger: And we’re able to capture that because of the permanence of capital and all kinds of other aspects of the setup. 

[00:25:27] Clay Finck: I love that you mentioned the duration piece. I was actually just listening to you chatting about Terry Smith’s book, Investing for Growth, and he points out that people get shocked by a valuation multiple and something might appear expensive, but when you.

[00:25:44] Clay Finck: are able to assess the duration of how much they’re going to be able to grow and how long are they’re going to be able to do that, then people are essentially, they’re just underestimating the power of compounding. When you look at over 10, 15, or more years, the compounding effects can easily be underestimated because we naturally think linearly and not in these exponential manners in which businesses operate.

[00:26:07] Christian Billinger: I agree. And that idea that. These great businesses, the fade rate at some point every bit all businesses will die or decline, right? But what we’re looking for are our businesses where we think that decline or the fade will be much slower than most people think. And I know I hear a lot of people saying this, but I do think generally speaking, it is a valid approach to investing.

[00:26:25] Christian Billinger: The idea that means reversion doesn’t happen after 10 years necessarily for these great businesses. Now, that’s not to say that you can pay any multiple, and because after the facts. For instance, there’s this idea of justified PE ratios. So you look at what PE ratio could I have paid 20, 30, 40 years ago for a business and still have generated sort of returns in excess of the market.

[00:26:46] Christian Billinger: But of course, I think that’s slightly deceptive because you cannot before the fact you cannot know with certainty that these are going to be incredible businesses. So I don’t necessarily think you can Cause if you do that exercise for many companies, you end up with a like a L’Oreal, you go back long enough you could have paid hundreds of P multiples into the well into the hundreds or two hundreds.

[00:27:06] Christian Billinger: But of course, before the fact, you don’t want to be doing that because things may not turn out so well. And I think generally speaking for these great businesses, because of institutional, the way institutional investors operate. and their timeframes and their incentives. I think there are great opportunities to find companies where the rate of decline or the fade will be much slower than generally perceived.

[00:27:27] Christian Billinger: But of course, you still run the risk of sort of misunderstanding or misanalyzing the business. I think that’s the real risk more than. In a sense, that is a sort of other side of the coin, isn’t it? In terms of paying up for a good business. The key thing to figure out is whether it’s really as good a business as you think.

[00:27:44] Clay Finck: I want to turn to discuss your experience working with institutional investors earlier on in your career because that seemed to have a big impact on you. How did that experience working as an equity analyst? help shape who you are as an investor today. 

[00:28:00] Christian Billinger: Yeah, I spent the first 10 years of my career working for a few different funds covering European equities.

[00:28:04] Christian Billinger: And I think as a training it’s a great place to train because you look at so many different companies, so many different industries, you get to run company meetings. You may even get a, some insight into the commercial side of it. So the fundraising and the marketing and the, so I think it’s a great place to train, and you get this really useful sort of toolkit or analytical techniques. In terms of analyzing a business and valuing a business. And once you’ve done that a few hundred times and probably thousands of times looking at different businesses, you have this great database of what sort of what are the hallmarks of a great business?

[00:28:39] Christian Billinger: And what do I need to look out for? And I think it has meant that in Europe, certainly, I feel that I have a reasonably good idea of where the great businesses are, who they are, and not all of them. And of course, you have new listings and takeouts. And so the environment changes a little bit, but I think it’s been really helpful in that sense.

[00:28:58] Christian Billinger: Equally, there are some things you have to unlearn when you move on to invest in the way we do now. You have to try and. not be overly focused on news flow in the way that you are, if you’re an analyst for usually if you’re an analyst for a sort of large institutional money manager. And actually, I’ve, the other thing is I find you have to get more comfortable with the idea of qualitative aspects of a business or an investment, as opposed to the quantitative aspects, because as an analyst for a large fund much of your work is focused on numbers and KPIs and valuation models and that kind of thing.

[00:29:29] Christian Billinger: And of course, ultimately that’s what matters, but the sort of process. by which those numbers are generated. I think that’s what you want to understand. And as you get more and more experienced, I think that’s where you spend more of your time. So the culture, the business model, and usually it’s not so easy to put your finger on these things, right?

[00:29:45] Christian Billinger: It’s usually a combination of factors. And sometimes you can’t even explain why business is great. It just isn’t. And in some ways that’s even better because it makes it harder, I think, for others to replicate what they’re doing. right? There are so many examples of businesses we’ve owned and other people have owned that are considered to be great businesses.

[00:30:01] Christian Billinger: And I think it’s it’s sometimes difficult to summarize in a few words, what makes them great. And in some ways that’s part of what makes them really attractive investments because they’re difficult to pitch. If that makes sense. 

[00:30:13] Clay Finck: That’s interesting. Charlie Munger has a quote of invert, always invert.

[00:30:17] Clay Finck: And when you. Get this sort of experience. And I see how much different your fund operates versus a lot of other funds having this very long term approach and having very little turnover. And I think that one thing that you’ve picked up is how short-term so many institutions can be.

[00:30:37] Christian Billinger: Yeah. I think there are a few issues and I think the time horizon is one of them. I think that’s partly because of. Incentive structures. Clearly, I’ve been in that environment myself, the annual bonuses or even the equity or whatever financial rewards there are, but clearly that creates a short-term sort of mindset.

[00:30:54] Christian Billinger: I think it’s also an industry, especially the institutional world. It attracts, I think, is often a certain type of person who is looking for activity and turnover in the portfolio. And there are certainly dangers there. I think team structure is another challenge. Especially if you have teams of analysts I’ve seen this myself where, of course, the analysts your idea generation is one of the important aspects of your job and you’re pitching idea after idea.

[00:31:19] Christian Billinger: And then at some point the PM inevitably will feel that they should probably be buying some of the things you, you argue for. I know most experienced portfolio managers are very good at saying no, and that’s their job. But I think there is always that pressure, I think. And so I think that’s certainly one issue.

[00:31:35] Christian Billinger: There are probably two of them, and then of course, it’s the fact that I think the commercial side of it, that most institutional money managers are much more in the business of raising assets or gathering assets and earning fees on other people’s money. then focusing on returns. And fine, it’s a fabulous business model, but I don’t necessarily think it’s the right investment model if that makes sense.

[00:31:56] Christian Billinger: I think it’s it’s very unfashionable to be running a sort of call it internally managed vehicle in the way that we do, or a lot of you get some private enlisted investment companies, certainly in Europe, you have quite a few of these. And in Scandinavia and Sweden, where I’ve spent some of my time, you find them.

[00:32:12] Christian Billinger: And that’s a very unfashionable model, but I think it’s very effective. You have the permanent capital, you have very low sort of operating costs. You have, I think, generally good incentives. So there’s a lot to be said for that. I think the fund model, I think, has a number of flaws. Having said that, of course, there are people who operate it successfully, right?

[00:32:29] Christian Billinger: Whether it’s we’ve talked about some of the UK examples like Linsell Train and Fundsmith or a TCI or an AKO Capital. And then in the U S there’s endless numbers of. Wonderful, long-term-minded, quality-focused funds, but I think it’s harder unless you have a name a track record and the right investor base.

[00:32:47] Clay Finck: Yeah, it’s a really great point that many funds are essentially marketing firms just trying to bring in clients. And then you think about what the implications of that are and they don’t want their returns to deviate. Too much from other funds or deviate too much from the market because if they underperform by a certain margin, which any approach is going to, eventually, then if they underperform, then they’re gonna see their investors bailing.

[00:33:10] Clay Finck: So essentially, if they’re operating like a marketing firm, I would think that their incentive is to be as close to the market as possible. 

[00:33:17] Christian Billinger: Yeah. And ideally, of course, a little better. But yeah, someone I worked for, he described this as. It becomes a case of product management as opposed to asset management or money management, right?

[00:33:26] Christian Billinger: You’re managing a product as opposed to other people’s money. And I think that’s a real issue. I have no solution to that. Other than setting up a different type of structure. 

[00:33:36] Clay Finck: One exceptional business I wanted to talk about more today was Markel. And you talked a bit about the qualitative aspects of a business in the short term, oftentimes what drives a stock price is just the change in the multiple or the change in the sentiment.

[00:33:52] Clay Finck: But over the long run, oftentimes what determines the returns is. Things like the culture and the people that work there. So that’s one thing you’ve talked about that stands out with Markel and Tom Gayner being the CEO there. I’d love for you to expand on some other things that stand out to you about Markel.

[00:34:11] Christian Billinger: I think it is such a good case study because it is a unique culture and most people I speak to who had senior experience at senior levels of the company, they all tell me what is what you get, right? It’s the real deal. And that’s my impression from having spent a little bit of time around some of the people who operate some of these businesses within Markel.

[00:34:32] Christian Billinger: Yeah, I think it is the culture. There are a number of aspects to that. One of the things that I love about the culture there, and by the way, I think People talk a lot about Tom and I think he’s clearly super important, but I think it goes beyond him. I think they have been very good at it. It’s my real sense that they have been very good at institutionalizing this.

[00:34:49] Christian Billinger: As with any business, as you grow, that becomes more and more challenging. But I think so far, generally speaking, they seem to be, there seems to be a real sense of purpose there. Yeah, one of the If we talk about Markel and Tom one of the things that I love is how they combine this discipline and the principles.

[00:35:07] Christian Billinger: So for instance, the four pillars they use or four filters they use for analyzing a business in terms of return on capital, reinvestment, management, and the price. The price you pay, is the entry price. So they’re very disciplined about that. And it’s a very simple, replicable kind of model or filter, but equally, I think they’re very pragmatic in terms of how they implement that.

[00:35:28] Christian Billinger: So you look at the fact, for instance, that they have all these monitoring, it obviously, it’s a relatively concentrated portfolio. If you look at the top five or 10 holdings, I’m talking about the investment, financial investment side now, but then of course, they have a very large number of very small holdings, these so-called monitoring positions.

[00:35:44] Christian Billinger: And it’s just a very pragmatic way of addressing an issue, which is, am I more likely to keep on top of these businesses and care about the financials they print and if we have a tiny exposure and if the answer is yes, so they effectively comes back to the idea of doing what works. So I think that’s 1 example.

[00:36:01] Christian Billinger: I think in terms of their conservatism or prudence, I think is something I really like. So they’re really, I think Thomas said he wants the business to be immortal. He’s looking at the next. 50 or 100 years and beyond. One of the aspects of that is, of course, running a very prudent balance sheet, and that’s partly avoiding leverage or excessive leverage or, but it’s also things like the way they the accounting treatments they apply in terms of insurance provisions.

[00:36:28] Christian Billinger: So I think there’s all these layers of trying to make sure that they’re around for another 50 and 100 years and beyond. And I like the fact that Tom strikes me as a gradualist. So I think he uses the expression of crawl, walk, run. He will try something in small measures, and if it works, they’ll do a bit more of it.

[00:36:47] Christian Billinger: And if it still works, they’ll do a bit more. And so if you take a holding like, so Diageo is a good example, because it’s, that’s something we’ve held for a long time as well. I think they’ve been invested for 25 years or more, 30 years, perhaps, but, I know that’s one of these holdings where gradually over time, they’ve just been adding a bit here and there.

[00:37:06] Christian Billinger: And there’s nothing dramatic going on in terms of portfolio weights, et cetera. But over time, they do more of what works and less of what doesn’t work. I think if you look at the way they think about buybacks, so I think certainly in the last few years, given the share price sort of relative performance of Markel shares, I think Tom acknowledges that buybacks make sense in principle.

[00:37:26] Christian Billinger: I think he also feels that many investors would like them to be buying back shares at a faster pace, but he feels that directionally it’s right. And we want to be prudent about the balance sheet and all these aspects. So I think he’s really about doing what is, as he says, directionally right for a long period of time and you’ll get good outcomes.

[00:37:43] Christian Billinger: So it’s just a very pragmatic approach to the world and to investing. And what I really like about it is that it’s replicable. So there’s all these wonderful investors out there whom I can never, and in some cases, I wouldn’t want to try and do what they’re doing. I think with Markel or certainly the way Tom runs the investment portfolio, I think many of us may not get the same outcomes, but I think we can try and operate in a similar way.

[00:38:08] Christian Billinger: So I think it’s such a good role model to be looking at. To your question, Clay, I think what’s unique about Markel, I think it is in a way as simple and as hard as it’s culture. Ultimately, yes, I like the structure. I like the I think the insurance business is probably a good insurance business.

[00:38:23] Christian Billinger: I like the three legs in terms of investments, insurance ventures, but I think it goes beyond that because if that was all there was to it, then I think it would be not easy to replicate, but there would be a blueprint. But clearly, there’s more to it than that. 

[00:38:37] Clay Finck: Yeah. And you do mention that you can model Tom as an investor in the way he operates.

[00:38:44] Clay Finck: And I think I do see a lot of similarities in the way you and Tom invest, where you’d rather compound at a moderate rate over a long period of time. 

[00:38:52] Christian Billinger: I’d love to compound at a high rate, but if I can’t, the second best option is a moderate rate for a long period of time. 

[00:38:58] Clay Finck: Yeah. I just think putting a big emphasis on that durability and trusting the power of compounding, I think.

[00:39:06] Christian Billinger: Exactly. And I think it’s partly also. Once again, being very pragmatic about it. I think that means investing in a way that you can probably sustain from a lifestyle point of view, right? You avoid the sort of risks of burnout that some people who post incredible returns for a shorter timeframe might suffer and risk running into.

[00:39:25] Christian Billinger: Of course, I admire when you look at people like Lynch and Druckenmiller and, but I think for most of us there, and I would argue in some cases, even if they tried to replicate what they did in many cases, they would struggle to replicate those numbers. It’s inspiring and it’s interesting to read it and think about, but is it a good sort of model for most of us?

[00:39:44] Christian Billinger: I suspect not. 

[00:39:46] Clay Finck: So you own Berkshire Hathaway and Markel. Are there any major differences between the two, or do you see a similar outlook between both of them, given that they have very similar business models? 

[00:39:58] Christian Billinger: Yeah, I think they are similar in many ways. Obviously the cultural aspects of the structure with, privately held businesses or fully owned businesses and investments in insurance.

[00:40:08] Christian Billinger: I think, yeah, the differences that I see are on the one hand, scale or size or complexity, clearly Markel is one would hope at a much sort of earlier stage of its journey, especially when it comes to fully owned businesses. So ventures is relatively recent, if you certainly, if you compare to Berkshire, a much more recent sort of focus area for them.

[00:40:27] Christian Billinger: And I think all of us expect that to become a much more important part of. Their business going forward. Yeah, I think clearly the scale means that I would assume I would expect that Markel there’s more uncertainty, if you will, for good and bad. So both on the upside and downside. So I would like to think that if things turn out well, the upside is perhaps greater for a Markel because they’re smaller.

[00:40:49] Christian Billinger: They can look at types of businesses that Berkshire can’t, but of course, on the downside, they’re not as diversified, right? They don’t have the same positions. If you look at the insurance business, of course, they’re not as they don’t have a broad portfolio. So I think the uncertainty there is perhaps a bit greater.

[00:41:04] Christian Billinger: I think they’re both. Fabulous businesses in slightly different ways. The other difference, and we could argue about this, but I would think that in the case of sort of key person risk, I would assume hopefully Tom will be running Markel for a long time. But when we get to the point where he hands over to the sort of, next generation.

[00:41:22] Christian Billinger: My feeling is that Markel will look less different after Tom hands over the reins than Berkshire will after Warren does, right? I would, for a few different reasons, I would assume that things might change a little bit more at Berkshire than they would at Markel. But of course, I that’s me speculating there.

[00:41:42] Clay Finck: I also wanted to tap into the spirits industry a bit. You mentioned that 20 percent of your fund. is invested in that industry. I’d assume across a wide variety of different countries there. So some of these stocks are Diageo and Remy Contro, and they’ve actually had a pretty rough 2023. So I’m curious what your thoughts are on that industry and specifically your thoughts on how these stocks have performed this year.

[00:42:09] Christian Billinger: We love the industry. We’ve, yeah, we’ve been invested. Currently, we have Diageo Remy and then we have David Campari. And also we, it’s not a distiller, but we’re invested in Heineken Holding and we’ve owned some of the other distillers in the past, like Brown Foreman. Yeah, there’s a lot of aspects. There are many aspects of those businesses that I think really suit the way we think and what we’re looking for.

[00:42:26] Christian Billinger: So in terms of clearly the, they’re very durable portfolios of brands, right? So they have that sort of. Yeah. durability to them. They’re time-tested. They’re great collections of brands. I think for consumer goods, it’s an unusually dynamic category. And it’s one of few, I think, major sort of consumer goods categories where you see growth in developed markets.

[00:42:46] Christian Billinger: So in emerging markets, clearly, it’s more about volume growth and to some extent, premiumization, and in developed markets, it’s more about the premiumization aspects of it. But overall, these businesses are showing growth across the board. Normally, not in the case of the Agile, but in the other two in the case of Remy and Campari, there’s the family control that we talked about earlier.

[00:43:04] Christian Billinger: So we think that provides this long-term mindset. There’s a number of aspects of these businesses that we really like. You’re right. So this year, now, normally I find nine months or 12 months it’s a relatively short timeframe but of course, you need to be aware of what is the market trying to tell us.

[00:43:21] Christian Billinger: I think it’s clear that the issue this year has mainly been the U. S. market which is super important if you’re a spirits company. So in Agile’s case, I think close to half of their eBits are from that part of the world. So it’s a very important market. And of course, having had an incredibly strong run during the pandemic and coming out of the pandemic, there’s been this very significant slowdown in the U S market this year.

[00:43:42] Christian Billinger: And in some categories, especially cognac. Growth has gone into reverse, right? So they just saw this tremendous growth, cognac, especially during the pandemic. And then there perhaps going into this year, inventory levels were a bit higher than normal. And then we’ve seen both underlying growths in terms of depletions but also de-stocking this year.

[00:44:02] Christian Billinger: So there’s been a very dramatic shift. And of course, you also have difficult sort of comparatives from last year. So that especially impacted a company like Remy because they’re They have a licorice and spirits division, but cognac is that’s where they make their money. So that’s been very, I think, painful for them.

[00:44:19] Christian Billinger: It’s also worth keeping in mind that Remy was trading at pretty high levels going into all of this when they were, I think they were trading just north of 200 euros. And so I think you know, Remy’s down 40 percent or something from the all time highs. So the issue has really been the U. S. market and especially in cognac.

[00:44:34] Christian Billinger: And of course that’s impacted Diageo to some extent as well, but much less so because they’re much more diversified across categories and brands and geographies. So normally those types of call-it-resets might create opportunities for someone like ourselves because we’re not overly concerned about.

[00:44:50] Christian Billinger: what a certain category do in six or 12 months and even less what destocking the inventory situation? I think for us, the more important question is a structural long-term question, which is in cognac, especially could we see a shift towards other categories and especially tequila, which is doing has done.

[00:45:07] Christian Billinger: And obviously growth has come down there pretty meaningfully, but it’s still doing very well in the U S I think is like three-quarters of the global total for that category. So it’s really a U S market. We’re a U. S. business at this point, but we see some of the same occasions and some of the same customer demographics, et cetera, as for cognac.

[00:45:26] Christian Billinger: So I think for us, that’s the more important question. Now, I still have faith in cognac being a sort of a good place to be invested for the long term, but that’s the kind of thing that we would Try and understand better. Could there be a structural shift to some extent? I think the U.S.

[00:45:40] Christian Billinger: market slow down and the destocking we’re less concerned about, but it’s very important to be aware of it because it’s those kinds of things that may create an opportunity, right? If you figure out that There’s been a sort of real reset in the share price for short-term reasons that would usually be a good place to be looking if you’re a long-term investor.

[00:45:58] Christian Billinger: So I think there are the issues slightly less important is probably the sort of the fact that the Chinese recovery has been for these companies been, I think, slightly disappointing. It’s not been as So dynamic, as we were hoping, but overall, we remain very happy holders of these, of all these companies.

[00:46:15] Clay Finck: Towards the beginning of our chat, we chatted about reinvestment opportunities. And one company that stuck out to me that seemed to be more on the mature side was Diageo. I noticed that. Over half of their cash flows are going towards dividends and share repurchases, and I’m curious about the runway for a company like this and how that plays into when you would ever sell maybe a mature business because we talked about at the beginning a quality investing approach, part of that framework is the runway for growth within a business.

[00:46:50] Christian Billinger: No, it’s clearly super important. I think organic growth. If I had to look at one metric operating sort of performance metric over time, and clearly that’s got to be it because that sort of informs everything. Hopefully, if you have good organic growth, you have operating leverage and you have leverage on your underlying EPS.

[00:47:06] Christian Billinger: And so that is, that’s key. On the one hand, you could argue these are relatively mature businesses. Having said that, Diageo is the largest international premium spirits player out there. Their share of total alcoholic beverages, global alcoholic beverages, I think is less than 5%. So Clearly, even for a company, the size and sort of complexity of Diageo is a highly fragmented market if you look at it on a global basis.

[00:47:33] Christian Billinger: So I think that’s a good sort of starting point to be aware of. If I look at historical growth rates this is an industry that if I look at the last 10 years, might have been growing at 5 or 5 or 6%, which I think is a healthy growth rate. For this type of business, if we can get 5 or 6 percent organic growth over time and say close to or around or slightly in excess of 10 percent underlying earnings growth or EPS growth, I should say that can create tremendous value over long periods of time.

[00:48:02] Christian Billinger: And then there’s the fact that there are pockets within spirits where you see tremendous growth. So we touched on tequila. I think the tequila, that market has doubled over the last five years. And within that, if I look at the last 10 years, Diageo has gone from something like 2 percent market share to almost 20%.

[00:48:20] Christian Billinger: I think they’re, they ended last year, maybe 18 percent or something. And that’s mainly because they own two of the best-performing or probably the two best-performing brands in the category, Casamigos and Don Julio. So that’s been an incredible success for them. So I think if you’re it speaks to dynamic portfolio management.

[00:48:37] Christian Billinger: So if you need to pay attention to where the growth is or rather will be, and you need to invest behind that. And they’ve done that very well in some cases, and especially in the case of tequila. And I see this in some of the other portfolio companies. So like Nestle, for instance, they’ve been very good at shifting resources to Faster growing categories like coffee or pet food or health and nutrition.

[00:48:59] Christian Billinger: So I think it’s possible for these large diverse or diversified organizations to get exposure to these pockets of growth if they’re dynamic about how they shape their portfolio. So I think there’s plenty of runway for growth here for the overall market. In terms of potential market share gains there’s volume growth, there’s premiumization.

[00:49:19] Christian Billinger: There’s, I think there’s a, there are a lot of healthy drivers here. And I know there are concerns about from a business point of view about young people consuming less. And I think that’s only partly true. I think if you look at the developing world, it’s not true at all. I think what you usually hear is that in more mature markets, Consumers, especially young consumers, tend to drink less, but better.

[00:49:40] Christian Billinger: In many categories, they’re not even drinking less. So I think sometimes that’s where opportunities arise, where there’s a narrative out there that some of these categories are dying or, and some of them look less dynamic. Vodka in the U. S. is not terribly attractive, but overall, I think there’s a slight disconnect between if you look at the hard data on market size and Consumers.

[00:50:02] Christian Billinger: All these things, it tell a slightly different story. I think often in certainly in alcoholic beverages, similarly for beer, I think if you manage these things well, I don’t think the outlook is nearly as bleak as I often hear. But of course, there are challenges. And that’s the reason why alcoholic beverages represent 20 percent of the portfolio, right?

[00:50:18] Christian Billinger: I think they’re great businesses, but I don’t want to have That seems like a sensible exposure and within that, we own companies with different exposure to different types of categories and geographies. And so there’s all these layers of we will be wrong about a number of things. So we just need to make sure that we can manage and mitigate the impact of that.

[00:50:36] Clay Finck: Just speaking from personal experience, it seems like seltzers is an area that just seems to grow more and more with the new brand popping up on the shelves each year. 

[00:50:46] Christian Billinger: Absolutely. I think clearly just like for tequila, I think growth is. come down quite dramatically. And that’s the demand side of things.

[00:50:54] Christian Billinger: And of course, in terms of the supply side of things, everyone wanted to get into that game. I think most of the companies we’re invested in one of the things we’d like about them is they’re in categories like cognac where the barrier century are so much higher. So you’re not going to have the same sort of huge influx of new capacity in those categories.

[00:51:11] Christian Billinger: So the demand side is important, but so is the supply side. So that’s how we think about spirits broadly. 

[00:51:18] Clay Finck: Christian, this is a fun discussion. I’m really happy we had the chance to connect and bring you on the show. Before we close out the episode here, how about we give you a chance just to let the audience know how they can get connected with you and learn more about your fund if they’d like.

[00:51:34] Christian Billinger: Yeah. We have a website. We outlined the philosophy, our holdings, there’s a bit of material on there, interviews and articles that may give you a sort of feel for how we invest and how we think, and yeah, there’s contact details on there and the address is Billingerforvaltning. se. And I’d be delighted if anyone wants to discuss any of the names we’ve covered today or anything else.

[00:51:54] Christian Billinger: And thank you for having me on. I really enjoyed the conversation, Clay. 

[00:51:58] Clay Finck: Wonderful. Thanks so much, Christian. 

[00:52:00] Christian Billinger: Thank you.

[00:52:01] Outro: Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or re-broadcasting.