#8 Matthias Riechert - Value Investing

The Nalu Finance Podcast

In this episode of Nalu Finance, we sit down with Matthias Riechert, Managing Director at P&R Investment Management, to explore how long-term value investing builds lasting wealth in an increasingly short-term world.

Matthias unpacks his investment philosophy and process, including:

• Why forecasting long-term cash flows beats timing the market
  

• How he finds “young elephants” with compounding potential
  

• Why simplicity and alignment with reality are key to success
  

• What investors often get wrong about dividends and ESG hype
  

He also shares the power of saying “I don’t know” and how walking factory floors can uncover hidden value before Wall Street does.

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🎙️ Transcript: Intro: 00:00

Nalu FM Finance Podcast. Insight into the financial markets.

Sponsor: 00:06 This podcast is courtesy of the Zurich branch of Commerce Bank AG, which offers over 20,000 publicly offered leveraged structured products in Switzerland. These structured products are accessible through a multitude of channels, including the BX, SIX Exchanges, and Swissquote Bank. More information can be found at certificate.commercebank.ch.

Stefan Wagner: 00:29 Thank you, Matthias, for being here. I'm here with Matthias Riechert. We know each other for more than 18 years. But we're here today to talk about value investing. But maybe Matthias, you can start with a little bit telling you where you came from and how you ended up in value investing before we jump into the detailed questions.

Matthias Riechert: 00:46 Okay, yeah, nice to meet you too. And thanks for doing this. All right, just just very quickly, quickly, I don't want to be boring. But I started in a small town in Germany. So I grew up in HEMA, which is near Dortmund. And very young, read some books about how to become a millionaire. And so I went to the local Sparkasse, the savings bank, and did a bank apprenticeship there, thinking I might learn it there. Well, I didn't. Then I moved on, did my Abitur, then I ended up at a option trading house in Dusseldorf, which was run by some Dutch guys who knew how to price options.

They used the Black-Scholes models on the old big screens. And I just came in when arbitrage wasn't possible anymore. In fact, when Timber Hill, basically started to plug into the system their software. So I couldn't, I couldn't do the easy money anymore. But I learned a lot about arbitrage, I learned a lot about options. And everybody scratched their head and thought, okay, what do we do now? And of course, nobody said, let's pick our bags and move on. One guy started to scalp, you know, he did thousands of trades every day. Another guy looked at technical analysis. I looked at everything and thought, I have no idea.

And then, okay, I basically packed my bag and studied business. Then I eventually ended up in London and first did an internship at Morgan Stanley Risk Management, and then at Morgan Stanley on the trading floor. And so that's where I met my boss then afterwards. And then in 2001, I started on the trading floor and met you, Stefan. At Citigroup, or back then, Sedim and Smith Barney, and that's where I spent nine years of my life learning everything that doesn't work in investing.

Stefan Wagner: 02:38 Yeah, you learn a lot of things in investment banking that you shouldn't do when you do your own business.

Matthias Riechert: 02:43 Yeah.

Stefan Wagner: 02:44 So, value investing in a sense has many practitioners, some famous like Benjamin Graham, the father of value investing, Warren Buffett, the oracle of Omar, and Joel Greenblatt with his magic formula. Many of them use different approaches to value investing. So, what is your definition of value investing? How you got to that?

Matthias Riechert: 03:08 First of all, I think the big insight is if you learn to separate the price, the stock price, from the actual intrinsic value. And very often it's the same or similar, but sometimes it's not. And so what is value? Value is basically mathematically, it's the present value of all future cash flows that you can take out of a business from here until eternity. And that's the theory. And so in practice, it means you have to do everything to become good at forecasting cash flows so that you can then estimate a value independent of the stock price. And then the trick is, of course, to buy relatively cheap to the value as best as you can. So as far as you can get it apart, or call it margin of safety. And if you do that, you'll be guaranteed to become rich. So easy.

Stefan Wagner: 04:05 You say that, but I think a lot goes into that to actually find such a company. So maybe can you walk us a little bit through your investment process and how you construct the portfolio for your company?

Matthias Riechert: 04:15 Yeah, yeah. So I think before you decide on which route to take, first, I think it's very important to think about where you want to get to. So, if you want to get rich in your life, right, and you only have one life, so fairly important question. There's one thing that seems to do a big trick, which is compound interest. And so once you understand the power of compound interest, you then play around with the inputs. And so for example, I have an Excel sheet on our webpage, where you can play around with different inputs, with your age, with starting amount, with the timeframe, with the expected rate of return. And then you can see how rich you become. It's pure maths.

And so what you see is that there are two things you want to bring up. One is a very long time frame. And the other thing is you want to have a high rate of return. So when I look at businesses, I would like to look at businesses that have an engine that has exactly that i.e. a very high rate of return and a very timeframe, very long timeframe to apply that. And so that's the starting point. And then, of course, the question, how do we find those? And I don't have the answer to it, but at least what you can do is you can study the successful ones. You can go into the successful ones and work backwards and see what they did to get where they are today. And then from that, you can develop and create a framework. And that's what I have. So I have a framework how to look for these businesses, and I call them young elephants. So I'd like to hunt young elephants.

Stefan Wagner: 06:00 And idea, how many do you have to look at before you find a young elephant that you actually invest into? So what's your hit ratio before you actually or ratio before you research versus what you invest?

Matthias Riechert: 06:15 Yeah, well, when you say look at, it depends on

Stefan Wagner: 06:20 more than just read their name and their maybe last financial reports, more depth.

Matthias Riechert: 06:27 So I would think of it like a funnel, right? So you look at a lot of things, but you sort out the not interesting ones very quickly. And then you have a deeper layer where you go deeper into it, spend more time and eventually you sort out all the ones that don't fit into your framework. And so when I start, I look at, you know, very quickly, I look at the business to sift out the interesting ones. And I think I measured it, I think on average, I spent 1.6 minutes on one individual company, just by looking at the financial history. And so that's the very first layer. And then the ones that I think look interesting, then I spend more time. Until eventually I do a deep dive where I spend quite a lot of time, usually months if not years, on one individual idea.

Stefan Wagner: 07:19 And once you have invested, how often do you review in the sense of how much time do you give it before something needs to change dramatically? How do you monitor that the assumption that you made why this is a good investment is still valid?

Matthias Riechert: 07:35 Yeah, so you want to observe the relationship between price and value all the time. I mean, theoretically, you can do that every second. So you want to find something that suits you and that suits your character. I think there's no right or wrong answer. But at least you want to follow your businesses as an owner, right? You want to know what goes on. And now you can follow the quarterly announcements, you can look at the earnings developments over time. But of course, there's a lot of happening around it, where you can spend time in trying to figure out whether your initial assumption is correct or not, or, you know, how businesses develop.

Stefan Wagner: 08:15 Now, we know each other for a while and you sometimes tell me some interesting funny stories. Is there one you could actually share with the listeners where, you know, it was a success hopefully, but anything that, you know, you looked at the company, you saw something they didn't expect and then other interesting things came out. Is there some real example that you can share?

Matthias Riechert: 08:38 There's always interesting learnings. I mean, every company is like a different animal really. And on both ends, I think I looked at a company where nobody looked at, and there were lots of short theses out there. Well-known names said this is really bad. When I looked at it, I spent a week in their stores, and I spoke to the employees, I spoke to customers, and I got the sense that if they did an NPS, a Net Promoter Score, I would bet it's high. In other words, the customer loved it. The employees were really, really thoughtful. And I thought that's such a difference to what the perception out there is in the market. And so we bought it at, I think, 2.8 times earnings.

And the market basically said this thing is gonna be gone. And it turned out to be a really interesting and very successful investment. And so everything is different. I mean, the other day, just a little one, I went to a business and visited the headquarter, big parking lot. And I saw a Rolls Royce in a flashy color with the company number plate, right? So obviously the car of the CEO. So red flag, yellow flag, is it okay or not? So that's an interesting data point.

And that one in itself doesn't tell you it could be okay, right? Maybe that guy is a car lover, maybe he's got his reasons. Or maybe it's an indication that his ego seems to be very important and he wants to show something, right? So, that's, but that's just one data point. And ideally, you want to, it's like a big puzzle, right? You want to turn around many, many pieces of the puzzle so that eventually you see a picture. And very often, I don't, I never see a picture. Very often, I have to say, I don't know. And it's fine to say, I don't know. That's something I've learned, right? I'd be happy to say, I don't know. But every once in a while, you see something and then you should invest.

Stefan Wagner: 10:43 I mean, from all the points you just mentioned, from what I know, is that you go very, very deep into and not only look at the financial reports, you look at the company, you look at the employees, even you actually go to the place many analysts, I think, investment banks never actually have seen the floor where the workmanship actually was done or clients with. But you also go the other way out and go take a very broad view and look at what the overall macro environment is. Is there something to be… to be worried about or maybe benefits that specific company that I'm looking at?

Matthias Riechert: 11:15 Yeah, well, first of all, I started the fund seven years ago, together with Thorsten Polleit, who is an economist. And so Thorsten is an exceptional economist, he's very good in analyzing the monetary policies and analyzing the monetary system we live in. So, obviously, there's huge risk if you have a few central banks interfering with the price of money, which is the interest rate. And so, I think that's probably the biggest risk out there and we don't really know what the outcome is going to be. So, first, we started to take those macro views and think about how to invest accordingly. And eventually, what you do is you do market timing, right? You try to forecast. where the ducks, where the SMP, where the whatever industry you look at is going to be in four weeks, in eight weeks, by the end of the year, whatever. And that's what we did initially, because we started very cautiously. So we had a lot of cash in the beginning, and even gold.

And over time, we asked ourselves, well, what really do we know that others don't know, right, when looking at macro? And we came to the conclusion that market timing is something we shouldn't be doing. In fact, I don't know anybody who can do market timing successfully over time. Maybe there's somebody I don't know, but at least I don't know anybody. And I for sure know that I don't know how to do that. And so when I look at macro, I try to always think about the individual businesses and what influence or what impact that might have on the individual cash flows of a business. But I never use macro as a forecasting tool to change my portfolio in terms of exposure generally, cash level or something like that.

Stefan Wagner: 13:07 You mentioned you started seven years ago. Question is, you know, how has it been? What's the track record? And how do you measure your success? You know, is there any… Do you care about loss of capital? Do you care about Sharpe ratio, volatility? What is sort of your thing you measure yourself by?

Matthias Riechert: 13:25 Yeah, so we grew up on the derivative side, so that's full of numbers, right? And I've learned this, once you learn to live with volatility, once you learn to accept that market jumps up and down, call it Mr. Market to use Benjamin Graham's story about Mr. Market and how to behave. Once you accept that and understand that, then all these numbers in terms of sharp range drawdown and so on become irrelevant. Because the only thing you care about is your long term growth and your wealth, right?

So I always accept or I would always prefer a bumpy, but steeper slope in terms of my wealth development over time than a flat but less bumpy one. Right. But of course, I also understand if there are investors who can't stomach volatility, and then they should look at those numbers. But for me, and I guess for probably many more people, they shouldn't be looking at it. Let me ask you if you own a house, right? Do you care about the sharp ratio of your house price?

Stefan Wagner: 14:35 I don't but I'm in the same camp as you and with the house price I always find the funny thing is that people always remember over the highest valuation of it and if it goes down they refuse to sell.

Matthias Riechert: 14:47 Yeah but of course there are all kinds of psychological things going on in your brain. I don't know any house owner, you know, owner, not, you know, trader or developer or something, but owner who, you know, has the slightest idea of where today's price is, right? But if you own a business, all of a sudden, the intraday movements become important. Really? Right? It's just a shift in the way how you think about investing.

Stefan Wagner: 15:18 So, obviously, you mentioned we only have one life and that's the one you want to make the most successful. So, you probably have structured your processes and your own work environment to help you be more efficient. And I think that's an ongoing process, but maybe you can share a little bit what works for you and how you did that.

Matthias Riechert: 15:36 Yeah, let me first answer the previous question in terms of track record. There is, of course, one number that is important, which is exactly the compound annual growth rate, the CAGR. And that's the number I want to maximize in my life. And so in terms of our seven year track record, we're just below 14%. And over the last five years, since we've been fully invested, we are well above 15%. So we outperform. We've outperformed each of the last five years. So just to get that out of the way. In terms of the question, what we do, well, I think the first thing, again, is to be clear about what you want to optimize, where do you want to be efficient, to do what.

And I think in investing, there are actually two games that you can play. So, the one game is you want to maximize the volume that you manage, right? Call that asset gathering. And so when you then work backwards, if that's your thing, and if you work backwards, you end up at what? You end up at a setup where you probably have a lot of salespeople, you have marketing guys, you have to have not just one fund because that fund might not work well so you want to have some diversification so we have many funds. You want to have an interesting theme. Probably today I would come up with some sort of ESG theme, right? And you want to spend a lot of time on going out, do interviews. You know, we're doing one here. I think this is the first ever interview I ever gave.

And, and, and so you can see why the business that that are well known look like they look right. Now, on the other hand, the other game you can play is you can play the what I call the lifetime maximization game of Kegel. Right? So you just care about performance. And if you then work backwards, how would you set up? Look, well, you probably don't have any salespeople. you probably are just few, you have many more people who are good at analyzing businesses and doing everything you can to become good at at maximizing your performance. And you probably don't want to spend much time doing anything else than analyzing. So you want to find an environment, a quiet, peaceful environment with people who share your your goal, with people who think in the same way, but who are diverse from their backgrounds to help you get a different viewpoint. You want to spend much time away from, you know, Bloomberg screens and everything else.

Stefan Wagner: 18:14 And numbers ticking red or blue.

Matthias Riechert: 18:16 Exactly. And you want to spend a lot of time with businesses, right? And not reading other people's opinion, but forming your own opinion about it. So I guess once you know what thing you want to do, and there's nothing wrong with the first version, right? Just to get that right. But I think it's important to get to be clear about what your game is. Most people think they can do both.

Stefan Wagner: 18:37 Very difficult. You mentioned theme, you know, ESG. That was sort of my next question for you. You know, what sort of other themes and trends did you see lately in your business, your artificial intelligence or certain consolidation in certain markets, digitization?

Matthias Riechert: 18:54 Yeah, I think ESG is definitely a hot topic. I guess the world has finally woken up to climate change this year, which is good. I think it's important to look into that. But as with those things, the risk is that many people see that as a marketing opportunity and then label everything they can with ESG in the hope of finding a lot of investors. And in fact, there are billions of dollars now piling into ESG themes.

Stefan Wagner: 19:25 Which itself could be a self-fulfilling prophecy, pushing up the price.

Matthias Riechert: 19:30 Well, it might at first push it up, but then, of course, price versus value, right? It might push up the price, but not the value necessarily. And so if you exclude the, call it sin stocks, right, it means that the cost of capital will go up for them, which in other terms means that the expected return will go up as well. Right? So that's why sin stocks, I think there are some research pieces out there probably have performed not that badly. And if you have more segregation in terms of this is okay, from ESG standpoints, billions of pounds or dollars flow into it. And you have some others where it doesn't happen, then you of course, can achieve higher returns with the sin stocks and less return with the ESG stocks. So that's a danger. And of course, the bubble is also a danger, similar to the dot-com phase. I mean, not every dot-com became successful. I guess the same applies to SGA. Not every vegan restaurant will be financially successful.

Stefan Wagner: 20:34 Fair enough. Now, looking back at now all your time in investment banking and in investment management now, is that sort of one of the biggest learning that you think you could share with somebody that this is, you'd sort of take away from it if you would?

Matthias Riechert: 20:52 Yeah, I think in general, I mean, this is probably more than just investing in general. I think it's fascinating to learn and understand how life works, how reality works. And then try to align yourself with reality because then it becomes easier, it becomes much more fun. At first, I flirted with the idea of becoming an activist. I went to a few AGMs where there was an activist going after management and so on. And I quickly saw that and I thought, no, that's not for me. So I find it much more fun to partner with entrepreneurs that have a dream, that have a vision, that want to build something, that want to start something, that really want to do something that helps other people.

And so aligning with how reality works is one of the big learning. I'll give you two more if there's time. The other one is what you don't learn at business school, which is simplicity. Don't go looking for complications where you don't need to. Admire simplicity. We own 11 stocks. It's very simple. Everything we do is super simple. There is no complex structure. We don't look at complex businesses. We look at stuff that I can understand. I like to keep things simple because in investing, you don't get paid for complexity.

So that's probably one of the other big ones. And the third one is, so I keep a list of aha moments. So every moment where you figured out something that turns out to be different to what you thought before, or that most people think. And that's quite an interesting list by now. And so, yeah, one in investing, for example, it's every time you go to a train station and go to the bookstore and look at the investing magazines, very often the title says, invest with the dividend kings or something, right? So as if the dividend yield is something that determines whether an investment is great or not. And of course, that's not the case. Once you understand capital allocation, you know that the dividend in itself can, in many cases, does not tell you how good the business is and how your investment will turn out. So that's one of those things where common wisdom turns out to be totally wrong.

Stefan Wagner: 23:12 Okay, I have one more question for you and that's you're up to, but at least one please, your three favorite finance movies and why?

Matthias Riechert: 23:22 Yeah, The Big Short definitely is great. I think it shows you how they did research, right? So when they went to I think it was Florida and went around and just got the whole story, right? They didn't need to read any research report, they just have to go there and see.

Stefan Wagner: 23:38 The ladies in the adult entertainment industry had like three mortgages.

Matthias Riechert: 23:42 Exactly, yeah. So that's a great one, great movie. The other one that's a bit older, I think you can see that on YouTube, is a film called Other People's Money with Danny DeVito.

Stefan Wagner: 23:55 Yes.

Matthias Riechert: 23:56 OPM. Yes. And so there's one scene where he actually explains the Benjamin Graham net-net investment style, right? Where he goes through the liquidation value on a flip chart. Yeah. And that's perfect. That's great. That's a great, entertaining, teaching movie about investing.

Stefan Wagner: 24:15 Excellent. Thank you very much, Matthias.