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Business Owner TGV vs.

the DAX

Year
2008 (3 months)
2009
2010
2011
2012
2013
2014
2015
Compounded Annual Gain 2008 H1 2015
Overall Gain Sep 2008 H1 2015

Annual % Change
in Business Owner
(1)
-13.4%
31.1%
27.0%
6.5%
18.4%
31.9%
24.9%
25,1%
21,6%
274,8%

Annual % Change
in the DAX
(2)
-17.5%
23.8%
16.1%
-14.7%
29.1%
25.5%
2.7%
11,6%
9,8%
87,7%

Relative Results
(1-2)
4.1%
7.3%
10.9%
21.2%
-10.7%
6.4%
22.2%
13,5%
11,8%
187,0%

Dear Co-Investor,
The NAV of Business Owner was EUR 374.75 as of 30 June 2015. The increase in NAV
was 25.1% since the start of the year and 274.8% since inception on 30 September
2008. The Dax was up 11.6% and 87.7% respectively.
Development of the funds participations
The following table shows the net income development of the funds holdings at year-end
2014 in order of importance.
Companies
Grenkeleasing AG
Novo Nordisk A/S
Baidu, Inc.
Berkshire Hathaway
(Book Value)
Google, Inc.
BMW AG (Pref.)
Credit Acceptance*
TFF Group S.A.
Bechtle AG
BETT AG
*New in 2014

Growth in
2014
38%
5%
25%
8%

2014
65
26 481
13 187
146 186

4%
9%
15%
44%
20%
29%

13 928
5 817
279
34
76
24

Reported Net Income in Local Currencies


2013
2012
2011
47
43
39
25 184
21 423
17 097
10 518
10 456
6 638
134 973
114 214
99 860
13 347
5 329
243
24
63
18

11 553
5 111
219
23
57
12

9 737
4 881
188
16
63
15

2010
28
14 403
3 525
95 453
8 505
3 227
170
14
46
12

When I buy part of a company, my investment hypothesis is always the same it is a


great business with wonderful managers at an attractive price though of course not
always correct. Having taken the plunge and bought a stake, I then track the
development of the company versus this hypothesis. Has the company expanded its
market and/or products and services? Are costs under control? Has management
allocated the companys capital sensibly?
Where the rubber hits the road is the companies earnings. A discussion of these is the
main theme of this letter.
If the hypothesis is playing out, then earnings should be going up. This need not be the
case every year. In particular cyclical companies such as BMW will occasionally have
down years as people put off major purchases, such as a car, in a recession, but over
longer periods the direction should be up.

Note that I have no interest in the development of share prices. This is why I dont waste
your time with a discussion of the funds or individual companys price development. If a
company regularly increases its earnings power, the share price will track this over time.
A robust investment process correctly identifies companies which increase their earnings
power. A rising share price is the outcome. My sights are firmly trained on process.
Confusion between process and outcome is the single biggest source of error in the stock
market. After all why not keep buying that hot biotech company with no hope of making
money if the share price keeps going up? Whats not to like? A complete loss of capital
when the party stops is whats not to like.
Grenkeleasing
Grenkeleasing had a fantastic year. It grew net income at a whopping 38%. This was
underpinned by strong revenue growth of 20% and a slower increase in costs. Grenke
has been investing heavily in new markets and services in recent years as a result of
which its return on equity (ROE) troughed at 11% in 2013 vs. an internal target of
16%. ROE was 13% in 2014 indicating that it continues to invest whilst at the same time
earnings have room to grow faster than revenue until the ROE normalises. In fact, I
suspect the underlying profitability is in excess of 16%.
The increasing margins reflect lower one-time costs associated with the launch in new
continents (South America in 2013 and Asia in 2014) and the greater revenue base to
spread investments over. It does not reflect a letting up of investment. Grenke entered
two new countries in 2014 in Chile and Croatia, opened three new locations in France,
and one each in Amsterdam, Saarbrucken and Bern. 70% of its business is now
transacted outside of Germany.
Product-wise, Grenke also continues to invest. The most promising area is factoring for
SMEs, where it benefits from its ability to process small tickets cost effectively and
underwrite risk accurately. Today, Grenke is present in Germany and Switzerland with its
own subsidiaries, and the UK and Hungary through franchisees. In the long run, I expect
the expansion in factoring to follow in the footsteps of leasing. In addition to factoring, it
continues to develop banking products through Grenke Bank including time deposits and
start-up financing.
Novo Nordisk
Novo continues to power ahead for the sad reason that the global diabetes epidemic
shows no signs of abating. In 2014, its revenues increased by 8% and operating profit by
13%, both in local currencies. As Novo reports in Danish crowns but generates the
majority of its business elsewhere in particular in the US, the local currency perspective
is most apt.
Net income growth lagged operating profit growth at 5% due to FX losses on unhedged
balances in the Russian rouble and Argentinian peso. EPS growth amounted to 8%,
helped by share buybacks. By historical standards, 2014 was a tough year for Novo. In
particular, it had to deal with the partial loss of reimbursement for its two most important
drugs at Express Scripts, the largest pharma benefit manager in the US. All things
considered, it was a decent year.
On the pharmaceutical front the news was much better. The launch of Tresiba, its new
long-acting insulin, continued in a further 14 countries. Most significantly, it was able to
resubmit an application for approval of Tresiba in the US in early 2015. If all goes to
plan, launch will take place in late 2015. Other launches included Xultophy, a premix of

Tresiba and Victoza, in the EU; NovoEight, a haemophilia product in Europe and Japan;
and Saxenda, a novel obesity treatment, in the US.
Both the near term and longer term pipelines of new products look very strong. Phase 3a
data for its new fast-acting insulin came in positive earlier this year and it anticipates
receiving approval in 2016.
Phase 3 trials for a once-weekly GLP-1 will continue throughout 2015 with filing planned
in late 2016. If all goes well it should be approved in 2017. GLP-1 is a hormone found in
the gut which stimulates insulin production only when glucose levels in the blood are
high. As such, it has lower hypo risk than insulin and is the preferred treatment for early
stage diabetics. Novo is already market leader for daily GLP-1 with Victoza.
If all goes to plan, by the end of next year Novo will have best-in-class fast-acting and
long-acting insulins and by the end of 2017 best-in-class daily and once-weekly GLP-1s.
Looking further down the road, Novo will make a decision later this year on whether to
proceed with phase 3 trials for an oral GLP-1 having completed phase 2 trials this year.
It is also working on insulin which can be taken orally. GLP-1 and insulin in tablet form
would be genuine game changers.
Baidu
Baidu enjoyed the strongest revenue growth amongst our holdings, as you would expect
given the earlier stage of the Chinese Internet market and the global trend towards
online advertising. Its revenues grew by 54% to roughly US$8 bn. The growth was
mostly organic, driven by an increase in the number of advertising customers from 753K
to 813K and above all an increase in average spend from RMB42200 to RMB59400. The
company continues to negotiate the transition from PC to mobile with 37% of sales
coming from mobile.
Net income increased below the rate of sales at 25%. It continues to invest heavily, in
particular in marketing and promotion (+133%), content (+125%), and r&d (+70%).
The main focus of the marketing spend was the pre-installation of its key apps on
smartphones. For content, it was the acquisition of attractive films and TV shows for
iQiyi, its video site. Whilst spending on app pre-installation should have plateaued in
2014, content costs are likely to increase further as there are a handful of companies in
China in a content arms race to become the leading video site. It is instructive that
Google has neither of these costs as it invested very early in Android and YouTube
effectively gaining dominance of the smartphone and video before the value in these
activities was widely recognised.
Going forward, the focus of Baidus investment will be O2O, standing for online-tooffline, and referring to the many offline activities such as ordering food or cinema tickets
which are at an early stage of going online. Baidu aims to establish its key gateways
search, maps, and Nuomi (group buy) in the nascent O2O market. As such, there will
be no let-up in the pace of investments. There are mixed feelings about this amongst
investors as in certain areas such as wallet or group buy there are already strong players
in AliPay or Meituan. I share these concerns to a certain extent, but on balance prefer to
see our companies investing too much rather than too little and have confidence that if
they do not work out, Robin Li will scale them back.
Berkshire Hathaway
Berkshire Hathaway celebrated the fiftieth anniversary of Warren Buffett taking charge
this year. Over that period, its market value has compounded at 21.6% p.a. For the

mathematically challenged such as myself, that equates to a 1,826,163% increase in


market value. I was feeling quite pleased about my near 300% return until I wrote that.
In 2014, the annual gain in book value was 8.4%. This figure probably understates the
increase in intrinsic value as Berkshires capital is increasingly allocated to fully owned
businesses. In contrast to listed securities, these are not revalued every year (unless
they lose value). Given that its five largest owned businesses what Buffett terms the
Powerhouse Five - increased their earnings power by 15% last year, I do not think it is
too audacious an assumption that Berkshires increase in intrinsic value was solidly
double digit.
What never ceases to amaze me about Buffett is his ability to adapt. Buffett is rightly
famed as a stock picker and indeed in the early decades Berkshires gains in book value
came largely from listed securities such as Coca Cola and American Express. As
Berkshires growing size reduced his opportunity set and ability to manoeuvre in the
stock market, Buffett switched his focussed to wonderful, wholly-owned businesses such
as Geico and Sees Candies. Then, when the amount of cash being generated
overwhelmed the universe of capital-light businesses, he switched his focus to businesses
with the potential to absorb large amounts of capital such as MidAmerican Energy (an
electric utility) or BNSF (a railroad).
In recent years, faced once again with the dilemma of too much cash and too few
opportunities, Buffett has opened up the universe of great but poorly managed
companies, such as Heinz, through the partnership with 3G and potentially others. This is
a universe he would have seen as firmly outside his sweet spot just ten years ago.
Not only has Buffett been successful at adapting, he has also managed to make a virtue
of Berkshires growing size. For very large insurance transactions Berkshire enjoys a de
facto monopoly. Of the eight insurance transactions ever recorded above US$1 bn, all
eight were underwritten by Berkshire, Buffett relates in his 2014 letter. In the financial
crisis, it was probably the only non-State actor that could write a very large cheque and
give a credible stamp of approval. It will not be the last time we see these advantages
play out.
Google
Google grew revenues by 19% in 2014 to US$66 bn, an astonishing rate for a large
company. Its net income from continuing operations was US$13.9 bn compared to
US$13.3 bn in the prior year, implying a more modest 4% growth. Continuing earnings
exclude a gain from the sale of Motorola Mobile in 2014 and a loss from the sale of
Motorola Home in 2013.
The discontinuity between Googles revenue and earnings growth is the main source of
controversy amongst investors. There is agreement on its cause: precipitous growth in all
operating costs, in particular research. R&D spend was US$6.1bn in 2012, US$7.1bn in
2013 and wait for it - US$9.8bn 2014. The controversy is whether such a high level
makes sense. The majority seem to think not. They view Googles various research
projects as flights of fancy of its Billionaire owners.
Needless to say, I am in the minority. Frankly, it is a mystery to me why there is so
much pessimism around Googles capital allocation. Its track record is virtually blemishfree. YouTube, Android, Chrome, and Maps are just a few of its home runs. Recall the
costs entailed by Baidu because it did not invest early in a mobile operating system and a
video site. Even when projects do not work, the losses are relatively small. Furthermore,
there is value and learning in trying to do new things. In Work Rules! Lazlo Bock,
Googles Head of HR, explains the importance of Googles audacious projects best known

as moon shots if you want to get the best people, you have to set the most ambitious
challenges.
Larry Page often says that he does not understand Wall Streets concern that Google will
spend too much on moon shots. His concern is finding sufficient opportunities to avoid
spending too little. Given that Google has US$64 bn cash in the bank, this strikes me as
the more legitimate concern. Larry goes on that he sees sufficient opportunity to deploy
this capital if he surveys the companys opportunity set. I find that reassuring, though no
doubt it would be better for the share price development in the short run if he were to
announce a big share buyback. Long term owners can be grateful that Larry and not Wall
Street is calling the shots.
Highlights from the remainder of the portfolio
TFF Group grew revenue by 20% and net income by 44% in the fiscal year ending 30
April 2015. The Company benefitted from the weakness of the EUR due to its substantial
businesses in Scotland (Whisky) and California (Wine). Nevertheless, this is an
astonishing performance.
BETT grew revenues by 10% to SFr. 72.6 m and net income by 29% to SFr. 23.7 m in
the financial year ending 31 October 2014. It benefitted from SFr. 9.8 m in pre-tax
profits from the sale of apartments at the Titlis Resort compared to SFr. 4.8 m in 2013.
Excluding these one-off gains, growth was 3% and 5% respectively. Despite the
devaluation of the Swiss Franc in January 2015, the current year is shaping up very well.
BMW sold 2.1 m cars in 2014 breaking through the 2 m barrier for the first time and
growing unit volumes by 8%. Revenues, which do not include sales from its JV in China,
grew by 6%. Net profit grew by 9% to EUR 5.8 bn.
Bechtle grew revenue by 14% and net income by 20%. This was a great performance.
The big question for Bechtle is what to do with its prodigious cash flow. The field of
potential acquisition targets in its niche is narrowing. As a distribution company, it has
little opportunity to invest in R&D. Its a nice problem to have, but a problem
nonetheless.

Quantity or Quality?
Most value investors including myself find themselves drawn to value investing by
quantitative criteria. The lower the p/e or price to book, the better. Thus, a company
trading on 10x next years earnings is better than 15x. A p/e of 5x really starts the pulse
racing.
Of course, I much prefer paying less than more for this years cash flow, but what
interests me far more is the absolute amount of cash a business is likely to generate over
its entire life.
This means giving a far greater weighting to qualitative factors such as a companys
overall market opportunity, its ability to raise prices, the durability of its moat and the
ability of the management to allocate capital, amongst other things.
If this means paying a higher multiple of this years earnings, so be it. As a result, the
multiples I have paid have drifted higher. This process reached a preliminary high in
2013, when I paid 18x next years earnings for Novo Nordisk (and felt I was getting a
bargain!).
So what is happening?
5

Of course, many will see in this a style drift bred by a multiyear bull market. I would like
to think something else is going on.
The seed of my scepticism on low multiple orthodoxy was planted by an excellent talk
Jeremy Grantham gave at the Annual Benjamin Graham and David Dodd Breakfast
(Columbia University, 7 October 2009). Grantham argued that whilst Mr. Market may
occasionally turn manically depressive, he is not a complete idiot most of the time. On
balance, companies accorded lower multiples are likely to have weaker prospects and be
higher risk. Is this really the pool of opportunities that the long term investor wants to be
fishing in? Obviously not.
Today, I see five main reasons for my shift away from low multiple orthodoxy.
First, the near-term earnings upon which any multiple is calculated can be very hard to
predict. I have reluctantly come to realise that my estimates of a companys near-term
earnings are generally not very good (ouch did I just write that?).
Thankfully, I am better at judging the strength of a companys competitive advantage
and the ability of its managers, factors which I happen to believe are far more important
in judging the overall earnings power of a company over the long run. Thus if I were to
tell you what I think Google will earn this year, the only thing I can guarantee come next
February is that I will be looking pretty foolish. On the other hand, I feel quietly confident
my daring thesis that Google is a great company run by talented entrepreneurs may just
play out. To my mind, it makes more sense to focus on what I may be good at and is
important, rather than what I may be no better at than a monkey with a dartboard and is
not all that important in the long run anyway.
Second, companies which are investing for the long run have to shoulder costs which
depress current earnings. For capital-light businesses the very best type of business
100% of these costs go straight through the P&L whereas the returns only play out many
years into the future. A good example is Grenkeleasing which has spent large sums on
legal fees and personnel to build a presence in South America and Asia for which there is
currently little in the way of revenue. A company not making these investments appears
cheaper at the same market price. However, if you believe the foregone investments are
value creative, this is not an indicator of an undervaluation.
Third, it is easy to spot a company that looks cheap on near-term quantitative measures.
50 years ago, it may have meant taking a trip to the public library to get a list from
Value Line of companies trading at their 52 weeks low, but today there are plenty of
screening tools on the Internet which tell you in an instant for free. It is far more
challenging to identify a company as undervalued based on a thoughtful analysis of its
long-term prospects. As such, it seems likely to be a far more fertile hunting ground for
mispricings.
If the key to unlocking value lies predominantly in quantitative factors, nobody should be
surprised if human fund managers are replaced by machines in the near future. I doubt
this will be the case, although I could be biased
Fourth, companies which are managed for the long run tend to apply generally accepting
accounting principles more conservatively. This can lead to the company with the higher
reported earnings not necessarily being the cheaper one at the same market price.
A good example is BMW. BMW has always deferred all profit from the sale of a car
through a lease at the group level. As its lease book has grown, the overall impact has
been to dampen reported earnings. Its peers have typically only eliminated part of the

manufacturing profit at the Group level. There is nothing wrong with this, it is just less
conservative. In a large company, these differences accumulate.
Fifth, I believe time invested in analysing a great company is likely to be more
productively spent. Both good and bad companies are equally well suited to help an
investor hone his analytical skills. Perhaps the bad companies are better suited as it is
easier to see what is important for success when they are obviously missing. However
this is far outweighed by the fact that the knowledge built up on a great business is likely
to be of value over an entire investing lifetime. The knowledge of the lesser business
becomes obsolete.
I remember once studying a company because it was trading at enormous discount to
book value. It bought consumer electronics on behalf of Aldi in Asia. The company is long
since gone as Aldi had the option to return any unsold (and greatly depreciated)
inventory (so much for the book value). I now know that no supplier should have Aldi as
their sole customer, but beyond that there is not much I can show for my efforts. By
studying great businesses, I hope to be able to add more companies to my investable
universe every year than I lose. Over time, an expanding investable universe can only
improve the opportunity set.
What are the implications for an investment process?
At a talk I attended in Omaha, Tom Gaynor, who runs investments at Markel, described
the current valuation as the snapshot and the development over many years as the
movie. He believes the movie is more important than the snapshot. I could not agree
more.

On the importance of management


I am sometimes confronted by scepticism over the weight I attach to managements
character and ability. Many think it is impossible to tell good managers from bad ones as
they are so well versed in selling themselves to other people (how else would they make
it to CEO in the first place?). Of those who think you can tell, many would argue that in
any case the impact of management is limited at best and massively overestimated at
worst. As Warren Buffett puts it:
When a management with a reputation for brilliance tackles a business with a reputation
for bad economics, it is the reputation of the business that remains intact.
I do not disagree with the great man. It is perhaps overlooked though that he refers to a
very specific situation. The business has bad economics. Management tackles it,
implying it has a short association with the business and a reputation acquired at a
different company in a different context.
But what about businesses with good economics run by managers with a long association
with it? This is the more relevant question as it is in this pool I am fishing. Under certain
circumstances, the impact of management can be enormous. Buffett would no doubt
agree. After all, the Berkshire shareholders meeting begins with a roll call of the
conglomerates all-star team of managers.
Exactly how they impact the business was brought home to me by Bo Burlinghams
excellent book on outstanding American small companies called Small Giants.
Bo looks at a number of companies - a brewer, a framing company, a restaurant group,
and others. They all do completely different things but each have a common intangible
quality which makes them special but somehow defies precise definition. Bo terms it their
7

mojo. Amongst other things, it is a certain authenticity and uniqueness, but not just
this. These qualities turn both customers and employees alike into fans, perhaps even
missionaries for the company.
Where does the mojo come from? In my view it comes from the personality of an
individual and that individual is almost certainly the founder. Companies at inception are
all identical and all are empty shells. Personalities by contrast are all unique. When a
personality can find its expression in a company the result can be uniqueness and in turn
authenticity.
Warren Buffett at Berkshire Hathaway, Jeff Bezos at Amazon, Larry Page and Sergey Brin
at Google, and John Mackey at Whole Foods are well known examples of this
phenomenon. Of these, only Google started out with a business with great economics,
but all ended up as outstanding companies.
If I have convinced you that in these situations management is uniquely important, you
might now want to ask whether these situations are also uniquely risky in the case that
their founders are no longer there.
Possibly but this need not necessarily be the case. These founders bequeath to their
companies a way of doing things perhaps best described as culture which can live
on after their deaths provided their successors keep the flame burning. If the successor
achieves this and resists the temptation to implant his own personality on the business,
the successor has no less an ongoing value to the business than the founder. Apples Tim
Cook seems to be doing a great job in this regard as far as I can judge.
As a believer in the importance of management, am I an advocate of outsized pay
packets? Probably not. Exceptional performance deserves exceptional reward, but the
situation I describe above is rare, whereas very high pay is not. Furthermore, mega pay
packets are often for Premier League-style transfers of a star manager from one
company to another. This is absurd given how situation dependent exceptional
performance is, as, sadly, Marissa Meyers travails at Yahoo! demonstrate. If it is any
consolation to her, I suspect Larry Page would fare much worse.
Above all, the single most important function of a manager is to be a role model. The
truly great manager understands this function and takes a little bit less off the table than
he justifiably could. Buffett, as in so many other instances, has demonstrated the power
of this idea. He has an annual salary of US$ 100000. Charlie Munger quips that he is
overpaid.
Investor Meeting
On 20 June 2015, we held our 7th Annual Investor Meeting. The subject this year was
capital allocation at companies and its importance to long-term returns. The children
went to the Deutsches Museum in Bonn followed by the traditional visit to the Haribo
factory outlet. My thanks go to those of you who made the journey to attend and the
InvAG for being such a generous host.
Yours sincerely

Robert Vinall
Meggen, 21 August 2015
8