Vinall is the founder and managing director of RV Capital GmbH and is based in Switzerland. His fund, RV Capital GmbH, has produced a huge 649.6 per cent total gain since its inception which translates to a 19.6 per cent annualised return, easily outpacing the MSCI World Index’s 9.47 per cent annualised return over the same period.
Vinall says when young investors start their investment careers, it is important for them to learn to manage their own money before they start out to work at a fund management company or for some other big organization.
According to Vinall when investors manage their own money, it gets easier for them to figure out on the one hand, how to avoid active mistakes, and then on the other hand, how to do even better next with future investments.
“It’s kind of natural, if it’s your own money, you know, you’re not reporting to anybody else. It’s fairly obvious and intuitive that you want to avoid mistakes and get better,” he said in an interview to a financial website.
Vinall said when he started his career as an investor he used a very simple but effective methodology of buying a lot of beaten down companies, which were trading below the net cash they had on their balance sheet.
Vinall says investors should try to make an investment based on a certain investment hypothesis so that they can later look back and see how it performed when they sell the investment and where they can do better the next time.
Pick companies with good management for investment
According to Vinall, when investors start their careers they rightly place a lot of emphasis on their analytical abilities and so they try and understand what a company does and analyse the various risks involved in all the different parts of its functionality after which they form an opinion on whether it’s a good investment based on that analysis.
But, over the years, Vinall says he realised that although investors do their best to be diligent analysts, it is not possible for them to gather all the information from the outside about a company.
So he says when investors are analysing a company as a potential investment, the most important aspect to get right is trusting the management who are running the company.
“You have managers who are very obviously, dishonest, misaligned, unmotivated, and, of course, you want to avoid those, like the plague. And then at the other end of the bell curve there are managers where it’s completely obvious that the company constitutes their life’s work. They have a passion for the business, it’s the center of their lives, and of course, it’s those guys that you really want to focus on and not get distracted too much by all the other stuff,” he says.
4 criteria to base your investment decision
Vinall says the investors should select their investments on the basis of four criteria:
- Will the company be around and flourishing in ten or more years’ time?
- Is the company building a long-term competitive advantage?
- Does the management set the right example?
- Is the price attractive?
According to Vinall, if all four criteria are met, investors should buy the stocks of that company with the intention to own them for a long time.
Invest like you own the business
Vinall says investors should invest as though they own the businesses that they invest in, which means ignoring short-term movements of share prices, and putting greater emphasis on buying great companies that can compound value over time.
“My philosophy can be summed up as: Investing like an owner in businesses run by an engaged and rational owner with the capital of investors who think like an owner,” he says.
Vinall says investors should be comfortable with buying shares that (1) have a troubled short-term outlook but have solid long-term prospects, (2) have no near-term price catalysts or (3) are shunned by Wall Street analysts.
He is often able to buy shares that Wall Street has ignored, giving him a great entry point on what he believes are long-term compounders, he says.
Qualities to look out for in companies before investing
To determine if a stock is worth investing in, Vinall looks for four key characteristics in a company:
- It is a business he understands
- The business is building or has a long-term competitive advantage
- The managers act with shareholders’ interests at heart
- The share price is attractive
Using this framework, Vinall has found investments that have compounded meaningfully over time.
Although his framework is simple it is by no means easy as each capital allocation decision is preceded by months of research and often years of waiting for the right price to come along.
“An investment process which consists of four steps, each of which has a ”yes” or ”no” answer may sound simple and indeed it is. This is because the best capital allocation decisions are typically made at moments of extreme market distress. To operate effectively in such an environment requires a process which is robust and simple to administer,” he says.
Have a concentrated portfolio
Vinall says some of the best investors such as Warren Buffett, Chuck Akre, and Terry Smith prescribe having a concentrated portfolio and he too believes in the same philosophy.
He says a concentrated portfolio of high-conviction stocks gives investors a better chance of market-beating returns.
Always better to be invested than be on the sidelines
Vinall says over the years he has always encountered investors who have asked him about when is it a good time to invest.
Vinall says there are two faulty assumptions that investors often make when they look for the answer for this question.
The first faulty assumption is that the stock market gyrates around the same level always which is not the case. On the contrary, developed markets increase at around 6 per cent per year which translates to around an 8-fold increase over 5 decades.
“If you have a 40 year plus time horizon and an investment opportunity that will go up 8-fold, how much is there to think about? The smart money is invested, not on the side-lines fretting about what to do,” he says.
The other flawed assumption that investors have is that investing is easy.
According to Vinall, investing is never easy and is not as simple as asking whether now is a good time to invest.
“In my experience, good investment opportunities are always plentiful. The limiting factors are the ability to identify them and, having identified them, the courage to act,” he says.
Vinall revealed valuable insights for young investors on what to do while starting their own fund.
Get structure of your business right on Day 1
Vinall says it is very important to get the structure of the fund right in accordance with the business strategy on the very first day itself.
“If you are a stock picker, you have to have a fund structure that allows you to pick stocks,” he says.
Avoid wasting time on marketing
According to Vinall, investors should focus on generating a great track record, and the right people will find them automatically.
Keep costs ultra-low
Vinall is of the view that too many young managers get a fancy office, hire an analyst when they should focus on keeping their costs ultra-low.
Vinall says fund managers need to have a clear communication and should be transparent with their investors for three reasons:
First, all investors not only expect to get good returns but they also want a good emotional experience. The only way to give the latter is to consistently and openly explain to investors what fund managers are doing and why.
Second, being open and communicative about their positions helps fund managers to provide transparency with their performance.
Third, sharing investor letters and thoughts helps expand the network of like minded investors, which is a real asset.
Let investors self-select your fund
Vinall says if fund managers lay out their philosophy in a transparent way, they can attract the right people to invest in their fund.
“When you are doing things the right way and you are attracting the right investors, they tell their friends which normally have similar expectations and time horizons. “It’s an amazing flywheel effect,” he says.
Say no to the wrong type of investors
Vinall says fund managers shouldn’t encourage investors to invest in their funds who don’t give importance to long-term gains and are only looking for short-term capital.
Vinall says if investment managers want to be their own boss and make the decisions then they should embrace the responsibility and authority as the decision maker.
Think of your fund as a business
Vinall says investment managers should analyse their own fund like they would analyse a business they invest in.
Seek great partners
According to Vinall, it’s often seen that great partners can really be helpful and bring the best out of each other.
“When you are doing things the right way they provide encouragement and they also challenge you. When you’re challenged you often find areas that you can do better,” he says.
(Disclaimer: This article is based on Robert Vinall’s various interviews and speeches )
Source: The Economic Times
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