My Investment Strategy

And why I call the best investments "Pommesbuden"

The last years have been anything but easy money. A global pandemic, a crash, an unprecedented hype of “home-office” stocks followed by another crash, rising interest-rates and a war in Europe have forced me to constantly rethink if what I was doing was the right thing. It has also taught me a lot.

It has taught me that the years before 2020 were really easy money but that this easy money came through low interest rates rather than my investing skills. I also learned that there were people making some serious amounts of money - all without buying tech- or growth stocks and that these people did incredibly well over the long-term.

So finally I am at a point where I realised what my “home-turf” is. I want to pursue investments which let me sleep well at night, which are less likely to be destroyed by rising interest rates and which can compound for a long time.

Key Pillars

While I have a clear strategy in mind the best way to describe it is in terms of pillars. Pillars provide me with enough flexibility to adapt and fit various companies and investment cases into my portfolio. So let’s get started.

Microcap-Land is a minefield

When we take a very high-level view of the stock market we could make the bold statement that a higher market-cap just means higher quality. A business which is worth 500m has just a higher value than a business worth 10m. The owner of a 500m business is also “richer” than the owner of a 10m business (assuming a similar stake).

This does not mean that a business worth 10m can not grow into a business worth 500m at some point. But looking at those two businesses today, one can clearly say that the market assigns to one business a higher market value compared to the other. And this makes sense, because - if we think about it - somehow the 500m business has grown into this valuation by doing solid business probably for quite some time. And this solid business in turn has grown its asset-base, customer relationships and whatever created value for that business.

As a consequence when we take a simplistic approach and divide the market into micro-, small-, and large-caps, most large-cap businesses are just solid good businesses. For sure there will be some businesses that collapse sooner or later or enjoy a temporary hype and are overvalued. But in total, large-cap businesses are generally more stable, more proven and more valuable than micro-caps over time.

For micro-caps the opposite is the case. Business with a small market-cap have either not figured out how to scale into a mid- or large-cap or are on their track doing so. But if we believe the law of numbers, most micro-cap businesses will be mediocre or bad businesses while only a few will make it to a mid- or large-cap.

This perspective is key for investing in micro-caps. You simply can not transfer your investing-style from large-caps and apply it to micro-caps. This is reflected in many things, like multiples. Paying a multiple of 20 P/E for a high-quality large-cap seems less risky than paying such a multiple for a micro-cap.

For this reason, my primary focus on investing in the micro-cap space is not to loose money. I think about it like this: Let’s assume we would give investors the task to allocate 100% of their funds into micro-caps and then track performance. An investor who would manage to not yield a negative return would be quite good in my opinion. After that we could look at performance.

Know the rules of your playing field.

Good Businesses ≠ Good Investments

Have you ever been invited to a barbecue party? Have you talked to random people about your investments in the stock-market? If yes, how much could other people relate? In my case, I rarely talk about stocks outside of my Twitter-Bubble because people would not know any company I am invested in. So what’s the point?

Most people invest in companies they personally like. They invest in Tesla because they like Elon Musk or own a Tesla. They buy Nvidia because they think “AI has potential”. The brutal reality is that the stock market in the long-term does not really care whether you like the company or its products or not. In the long-term performance is just based on the price you paid and the execution of the company. Period.

My investment in XP Factory is the best example of this strategy. Actually I am not a socialiser by nature so you would probably never spot me in a Boom Battle Bar or Escape Hunt venue. The only time I have visited such a place was when we had a corporate event I could not reject.

Yet, what I know is that many people love to go out and socialise with other people all the time. From my research I also know that people search for those kind of venues and that many new companies/ventures pop up in this space. So why not invest?

The same perspective applies for boring companies doing dead-boring stuff. There is no law in investing which says that most money is made by investing in exciting companies reinventing the future. The only law dictating your returns is the price you pay for what quality. Period.

While the most valuable companies on earth probably operate in secular growth markets, it does not mean that …

• any company operating in a growth market will be successful

• great products can’t be a fad at some point

• a hyped company can’t come down to earth pretty quickly

• small businesses that operate in a niche can not be equally successful investments

Separate what you like from what you invest in. You will get a much wider choice of interesting businesses.

Quantity before Quality

Have you ever learned how to negotiate? If you are a good negotiator you know that negotiating is all about alternatives. If you demand a higher salary from your boss you should have a better alternative before starting negotiation. If you lack that better alternative, any salary suggested by your boss will become your best alternative. Do you feel comfortable with that?

It’s the same in investing. If you only know Nvidia, AMD and Tesla you need to chose between these stocks. Maybe a month later you get to know Gamestop so you add it to your list of alternatives. But in the end, your investments are defined by your basket of alternatives. The better your alternatives are, the better your investments become.

One way to do this is to screen as many stocks as possible. This is what Peter Lynch is famous for. He called it “turning rocks” and said “the one who turns over most rocks wins”. You can imagine how picky Peter was by giving such a recommendation. But excellent fund managers need to be picky because the best investments are rarely stocks that everybody knows and owns.

When screening stocks it is less about quality. You don’t need to dig super deep and make complex DCF calculations in the first place. You need to screen it for some minutes and just find it “interesting” or not. What do I mean by “interesting”? Think about it like sort of a “setup”. Note that I am not a “special situations” investor as setups like below are found en masse (well, maybe not en masse but often enough).

Setup A (i.e. XP Factory)

A stock has collapsed 90% from its all-time high and has become cashflow-breakeven in the last quarters. Revenues are growing at a rapid clip and the company trades at single-digit multiples.

Setup B (i.e. Croma Security Solutions)

You look at the income statement and see that revenues have halved in the last year. You wonder “what happened” and check the filings. You realise that the company has divested a loss-making division, and has a new 5-year plan focused on growing profitably its high-margin core business.

Setup C (i.e. Basic Fit)

You see a business with high Capex spendings eating nearly all operating cashflow. You wonder whether this is growth or maintenance Capex. Remember, the official definition of Free Cashflow is Operating Cashflow - Capex. So on paper, every company spending too much on Capex is not profitable. But what if the major component of Capex is growth Capex?

Fore sure these are not the only reasons why I bought the stocks. There are many other factors I will talk about later.

The more stocks you screen, the better your alternatives. And the better your alternatives are the higher you can set your benchmark.

There is a Timing Component

Before you tell me that I am a market-timer, let me elaborate. When you look at most indexes, you see pretty stable upward trajectories. But as stock pickers know this is not how individual stocks move - this is just what happens if you merge thousands of charts into one chart reflecting the growth of the economy (or a subpart of the economy, like technology).

Let’s say you randomly pick 10 stocks, the probability is high that only a few if at all have a “nice-looking” chart. From my extensive screening activities I can tell you that most stock charts don’t look even solid - they look horrible, often going nowhere for ages. While I take the perspective “the past is noise” here you still wonder, how you could ever consistently make profits when most stocks don’t move up on a straight line.

Well, this is where the timing component comes in. If you dig deeper you will realize that in theory there are always people who made money on any stock at a certain point of time. While it is various points of time that are represented on the x-axis of a stock chart, it is not the determining factor for outperformance.

When we do backtests we would realise that people who made money on those stocks had bought at reasonable valuations when the company was doing well or better in the weeks/months/years to come. And this is what we are looking for when screening stocks. It is not by accident that the stock moved up and down a lot. There was always a price someone paid and there were always some fundamentals.

And remember.. the past is noise. There is a reasonable chance that a company can become a long-term compounder after trading sideways for ages. This is what you need to find out.

We might stumble across great quality companies but at the wrong time (trading too expensive). For sure we could put them on a watchlist waiting for more favourable times and history tells us that those times come if we wait long enough. So just quality is not enough if we would need to pay too much for it.

We might also find stocks that are cheap but still become cheaper. Let me tell you one thing. If a company has a high, obvious chance to become highly profitable, the market realises quickly - even in Microcap-land. So avoid stocks where it is just too speculative yet to place a bet for improving fundamentals (I tell you my hard learned lessons here). Look for execution and better average up before losing money on a few percentage points discount.

When screening stocks, find stocks for an investment today by focusing on today’s fundamentals. Finding quality is not enough. There are many quality companies.

Why I invest in “Pommesbuden”

“Pommesbude” is a German term and describes a kiosk selling French fries, hot dogs or burgers. When you think about a high quality business you would probably not think about such kiosks.

Look at this tweet from someone who claimed that my name says probably much (not positive things) about my investment style. Btw. this guy wrote his bachelor thesis about Tesla.

But this is the point.

Accept that investors in fancy, high-tech, high-growth business may be the cool kids on barbecue parties. They are seen as great visionary people who are doing great calls. And in some market phases which can take very long they actually smile because they think they are genius. But over the long-term they don’t.

Knowing this, makes be less emotional reading comments like this.

I try to invest in companies that are tiny, underrated, neglected or misunderstood. Further, it is incredibly boring to sell French fries. It’s also a pretty low-tech business.

Yet, there are good examples of businesses that started as “Pommesbude” (think about Mc Donald’s or Domino’s Pizza) that became monsters. Keep this in mind. Some businesses may not look glamorous today but time passes and the next Domino’s are in the making today.

The secret sauce of Pommesbuden Investments

So what are other characteristics of “Pommesbuden”?

Easy to understand

First of all, they are easy to understand. When the core-business is easy to understand you have more capacity to understand the key parts of your investment thesis. The key part is to understand how the company earns money.

Easy to model

Companies with simple business models are also easier to model. So when you know that a typical store has growth capex of 0.4m and a revenue of 1m with a 20% EBITDA margin you can imagine how figures look when 5 additional stores are added each year. You also know that ROCE would sit around 50% in this example which is quite remarkable. This is called unit economics.

There are many boring businesses which expand like this. They know that a concept works and they just replicate it. Dino Polska, a supermarket in Poland, is another example of a small business which became a monster.

Cash generative businesses have one thing in common. They convert revenues efficiently into net-income and cash. And they convert assets (i.e. stores) efficiently into revenues. This is basically the concept of ROIC and it applies almost to any business - but there are only few businesses that truly master this over the long term.

Local monopolies

People often think that “Pommesbuden” operate in a competitive market and are therefore mediocre businesses. Common examples for “Pommesbuden” are supermarkets, kiosks, stores, gyms, etc. While the market as such is competitive a local business can have a big moat.

Think about where you regular get your lunch. Is it the store at the other end of the city or a store nearby? Would you go 1km further to get a 10% better quality or are you lazy like I am and just take what you get? Local stores build local monopolies. People tend to go to the nearest store available. Aldi and Lidl are two examples of world-class local businesses in Germany. Guess what? The owners belong to the richest people in Germany.

All about capacity

While fancy tech businesses are all about churn and customer lifetime value, local businesses are just about capacity. Let me explain. If you ever decided to build a gym in your neighbourhood all you need to do is to check how many customers you need to cover your overhead. So you take a reasonable percentage of people living in your neighbourhood that fit your target group and see whether you can hit that threshold. Once you cover your overhead, you are done. Every dollar that comes on top, flows through EBITDA. There is a reason why owners of well-run local stores own Porsche cars.

Side-Note: There is also a reason Bill Ackman’s best returns have been in restaurant businesses.