Unlocking Value Investing Strategies with Daniel Mahncke: Behavioral Insights, Small Cap Analysis, and Portfolio Diversification

Unlock the secrets of disciplined investing with Daniel Mahncke, a finance and economics student from Frankfurt, Germany. In this episode, Daniel shares his journey into value investing and behavioral finance, shedding light on how legendary investors Warren Buffett and Charlie Munger shaped his investment philosophy. Learn how to mitigate biases with a structured investment process, inspired by Daniel Kahneman's "Thinking Fast and Slow," and the importance of integrating behavioral insights into actionable strategies.

Explore the exciting world of small-cap and micro-cap stock investing as Daniel offers his expert analysis on the differences between US and European markets. Discover why German small caps, often industrial or local production companies, provide tangible value and how cultural variations in stock market engagement impact investment strategies. Gain valuable insights into the microeconomic focus in Europe versus the macroeconomic considerations in the US and how these nuances shape market participation.

Navigate the complexities of portfolio management with Daniel's firsthand experiences and strategic advice. Understand the challenges of maintaining a concentrated portfolio and the tough decisions it entails. Learn the importance of geographic and sector diversification to manage risks and capitalize on growth opportunities. Daniel's discussion covers everything from microcap companies to investing in Chinese giants like Alibaba, offering a comprehensive view of modern value investing. Don't miss out on these key takeaways and investment wisdom from a passionate and knowledgeable guest.

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Transcript

Speaker 1: 0:08

my name is michael guyad, publisher of the lead lag report. Joining me for the rough hour is daniel monk monkey. Um, daniel, introduce yourself to the uh audience. Um, you've got a fairly large following. Good, uh subscriber race your newsletter. But who are you? What's your background? Uh, what have you done throughout your career and where are you based out of?

Speaker 2: 0:27

yeah, uh, thanks for having me first of all, and I'm based in germany, in frankfurt, and I'm 23 years old, currently studying finance and economics. I have about a semester to go, then I'm finished and I'm also an ex and I'm posting on X. Mostly I'm posting on investing in general, investing philosophy, with a focus on value investing and also behavioral finance. I think that's a topic pretty close to value investing, for all of you who know Charlie Munger know that there's pretty overriding yeah, it's an overriding topic. Yeah, that's what I started out with.

Speaker 2: 1:09

The whole idea of Post1X was basically to just consolidate what I was learning myself by writing on it, by explaining to other people. I think that's the best way to learn and that was the idea of starting my account. And then I continued with starting my own website. It started out as a newsletter on Substack where I just put out similar, more long-form content, but similar to the stuff that I did on X so value investing and behavioral finance. And then I kind of changed what I did there by doing more stock analysis and stock research, because I just felt like I've consumed so many books and so much on value investing philosophy that I thought the best way to learn more is actually get deeper into investing and to write stock analysis to kind of improve my thesis and my process of investing. So that's what I was sharing. That's what I'm currently sharing on Substack on my own website. Yeah, that's what I do.

Speaker 1: 2:30

So I give you a lot of credit. Uh, you're, you're young, you're taking this seriously. I don't hear a lot of um younger investors or traders talking about behavioral finance at all. Um, most of it is, uh, talking about gamma squeezes and options and yoloing and things. Um, what attracted you to the psychology end of things?

Speaker 2: 2:54

um, I think most young people start out, um, looking at large caps, mostly us large caps. I did this, uh, I did it myself, because that's what you hear on the news all the time and I think it's the only thing that's on the radar. If you start out investing everybody now, maybe if you came in the last year or two you've heard about NVIDIA. Everybody knows Apple. Those are the type of companies that they just see in everyday life, so you have kind of a connection to them and I think if you are in these large cap situations, you're hearing a lot of news and all of that stuff.

Speaker 2: 3:31

And behavioral finance is really a topic that is mentioned there and I personally don't quite remember how I started out about that topic, but I do know that I came into the value investing space pretty soon and the most prominent figures in the value investing space have been and still are Warren Buffett and Charlie Munger, and I think especially Charlie Munger was a big fan of behavioral finance. I think his main or his favorite book on the topic was by a worse persuasion. I think there was one that I came across pretty late at the stage. The first one I read was Thinking Fast and Slow by Daniel Kahneman.

Speaker 2: 4:16

I consider it one of the best books I've ever read, although I get a lot of backlash for it sometimes because it turns out a lot of people think it's pretty boring. Lash for it sometimes because it turns out a lot of people think it's pretty boring. Maybe that's also why, as you just mentioned, a lot of people are not really keen on the topic of behavioral finance, because it can be kind of kind of a dry topic, especially if you hear that, for example, daniel Kahneman himself said you cannot, basically, or you can't, do anything about authority biases and heuristics, because in the end they will always be there and it's hard to actually avoid them. I think it's nothing that's immediately driving profits to your investing thesis. It's more in the background and people look for quick profits for big gambles. So it's not a topic that's the first on a young investor's mind.

Speaker 1: 5:08

I was smiling when you mentioned thinking fast and slow, because that is one of the great ones. I actually saw Daniel Kahneman speaking at Columbia University obviously before he passed a few years ago, and I'm glad you mentioned that point that even Kahneman himself said that you can be aware of these biases but it doesn't mean you can actually do anything about it, which I think gets into a conversation around how do you create an investment philosophy that is as close as possible to not having biases? I mean, arguably, if you have sort of a more rules-based approach that can hopefully get rid of biases because it's based on the rules, independent of your view in the moment in time. But how do you reconcile sort of the experience, the knowledge of behavioral finance with how you actually invest yourself?

Speaker 2: 6:00

There are basically two things that I like to do. The first is clear structure of my investing process, so that I know where I want to look for investments, where I don't want to look for investments and, especially, where I don't want to consume any use topics and I think they are very interesting. I had politics in school and politics is something that I'm interested in, but the problem is, as soon as I consume a lot of macroeconomic things, I kind of integrate it into my investing, even if I don't want to. So I stopped doing that mostly, and that's one of the things that I do, that I just I wrote down the list of things that I consider important for my investing philosophy and for my investing process, and everything that's not included on that list I don't spend time on. That's one thing I do.

Speaker 2: 6:54

The second, most important thing and that's actually something that Daniel Kahneman also said, although he said it's hard to avoid biases he said if there's one thing investors should do, it's writing an investing journal, because an investing journal is once again a topic of structure. It's structuring your thoughts. It forces you to put something on paper that you can be measured against, because oftentimes you go into an investment and you have a rough idea of what you expect from the company and what you expect from the stock also. But half a year later or a year later, you look at it. It didn't perform as you thought it would be. But then you have all kinds of reasons for why it didn't and why it can still, in the future, perform as you want it to, and it's pretty easy to convince yourself that that's the right path and you're still on your investment thesis.

Speaker 2: 7:45

But if you have written down, you actually thought about the company and how you thought it would evolve and it's not the case, it's pretty hard to fool yourself anymore. So I think writing an investing journal, having a structured approach to investing, that's the best way. And, by the way, structured investment process. Just shortly I would like to paint a picture of how exactly that looks. But I think it's pretty dependent on what stocks you look for and your philosophy individually. So I cannot say, okay, do step one, two, three, and then you're avoiding all the biases, but you have to kind of adjust to your own philosophy.

Speaker 1: 9:00

Part of identifying what your investment philosophy is is figuring out what part of the market you want to play with. You want to apply the philosophy, which means domestic which in your case would be Germany, or international, which would be US or other countries from your vantage point, as well as what part of the sector side, what part of the market cap side. So let's talk about how you identify the opportunity set that you gravitate towards and why that part of the marketplace appeals to you.

Speaker 2: 9:37

Yeah, as I mentioned, I started out in large caps and it was mostly us large caps. I'm still mostly looking in international markets, so not necessarily Germany, not even necessarily Europe, although I think two or three positions are before you currently are small caps. That's also when I started out in large caps. Now I'm definitely more looking into smaller, small caps. That's also the point I started out in large caps. Now I'm definitely more looking into smaller, micro caps because that's part of the structure I mentioned. What I realized is that you need to look where there's a better opportunity set in terms of structural advantages that companies can have to outperform the market. And if you look at large caps, that's something I needed to learn by making mistakes. Basically, a lot of the situations that you can encounter in large caps are situations that are opinion-based. By opinion-based I mean that there's a company that people say it might be mispriced, might be too expensive, it might be too cheap, but what it actually is depends on your opinion and in hindsight it's pretty easy to say, okay, the company was overpriced because of X or Y and same at the other same kind of when it's too cheap. But you can only say it in hindsight. There are very few situations where you can actually look at a company and it's pretty clear that it's, for example, too cheap. I think one example of that might be Meta in 2022, where there was a huge reaction to I think it was an earnings call or whatever it was because advertisement broke down. There was a huge reaction by the stock market and I think a lot of value investors got in because they realized, okay, the reaction by the market is definitely too strong for what happened to Meta. But I think those are exceptions and large caps, smaller micro caps. On the other hand, they have some structural advantages. The first one is that there's relatively low competition because most of these stocks are too small for institutional investors to own, so all the investors that are in there are retail investors, so they have fewer. Well, they have less money. There's just a lot less of a rational market, which, in large gaps though I wouldn't count myself as someone who says markets are rational, but they tend to be more rational the larger the companies are. That you um kind of have in your investing universe, and so you have no competition. You have a lot of runway left, because it's just a lot of big numbers if you have a company that has revenues of 5 billion and getting them to 10 billion, it's a lot harder than if you have a company that has revenues of 1 million and you want to get it to two million. So there's a lot more runway, a lot more leeway for the company to um, to kind of grow into um.

Speaker 2: 12:31

Those situations are more often asymmetric bets because people or because there's low competition, the prices tend to be cheaper, so you can buy companies that actually have a great growth outlook at cheaper prices. I just recently analyzed a company I also put it on my website that you were able to buy for price-to-earnings ratio of 13 to 14 and it had triple-digit growth rates. So there's a lot of structural advantages to looking for smaller companies and I'm most looking to micro and small caps. Like I said, I do have some European smaller micro caps, but I'm also open to US micro caps. What I don't do maybe I can add that already is investing in Asian micro small caps, because maybe you'll ask a question about that later on or the next one. There are some disadvantages to microcaps and I feel like those disadvantages are a lot more prominent in countries with different regulation and maybe different stock market culture.

Speaker 1: 13:40

So I've been writing about how US small caps have not participated at all over the last year, largely because a lot of these small cap companies in the US have very high debt. So so long as there's this hire for longer scare when it comes to interest rates, these companies have a headwind. Is that a similar dynamic when it comes to European small micro-cap stocks? I mean, as I understand it, they haven't really participated as much either relative to the large players, right, but is it the same sort of reasoning its concerns around the debt loads of many of these companies?

Speaker 2: 14:21

Yes, I think on the macroeconomic level, the worries of the investors are pretty much the same, although, I must say, in contrast to large caps, where probably most investors should invest in ETFs to have kind of the best performance for themselves, I think that's something that doesn't work in small caps. If you look at the data, it will tell you that small caps or micro caps are not participated in the rally that you saw in large cap stocks, especially in the S&P, although I think you also talked about it. The S&P is not really improving as an index. In my opinion, it's just a handful, also talked about it. The S&P is not really improving as an index. In my opinion, it's just a handful of stocks that drive it. But apart from that, I see that even in the years prior the S&P outperformed from something Russell and other small cap indices. But I think if you invest in small caps, it's about stock picking. So I wouldn't just buy a basket of small cap stocks because and maybe I can now come to the disadvantages In small caps the business is a lot more volatile than in large caps.

Speaker 2: 15:27

Large caps is saying that stock movements are more volatile than the actual underlying business, and then micro and small caps. That might also be true, but the margin by which it is true is a lot less severe. So businesses can be very good in a year but they can be completely changed two years from that. Maybe a product that they sold is not going well anymore. It was the only product that they sold. Then we have a portfolio of products. That happens a lot. So picking the right company when you invest smaller microcaps is very important. So I wouldn't kind of take the performance of indices for smaller microcaps, compare them to the large caps and then feel like the opportunity there's gone. I still think it's there on the silver and gold standard.

Speaker 1: 16:18

One of the big differences between US markets and European markets is sector composition, mainly tech. The US is essentially driven by tech. Most other European averages. The top sector tend to be financials, industrials in particular, and when it comes to the small cap side in the US a lot of these small cap stocks also are in the biotech area, the sort of regional bank area. What's the makeup of the sector composition broadly speaking, when it comes to small cap, micro cap? European averages?

Speaker 2: 16:55

Maybe I can especially talk about Germany, although it's pretty much the same for other European countries too. For example, if that's in one company in Italy, that's a conglomerate, so it owns a lot of companies, but they are mostly industrial or they are local brands or something like that. To you in Germany and, like I said, in other European countries, often have is I don't know if there's an English term for that, but in Germany we, like I said, in other European countries, also have is I don't know if there's an English term for that, but in Germany we call them the kind of the champions of the middle class, the middle class or hidden champions we often call them. Those are companies that you as a consumer or just as a normal citizen you don't know them, but they are very big in their own categories or their segments. And, like you mentioned in the rest of biotech and companies like that, in Germany it's more production companies, those companies, and if I invest in smaller microcaps, I actually like that because I often struggle.

Speaker 2: 17:53

For example, if there's a biotech company and it has great numbers, then I still feel like I cannot really judge the product or the quality of the product.

Speaker 2: 18:02

For example, I recently had a pitch of a company that looked great and the fundamentals looked great.

Speaker 2: 18:09

The only problem is it had one main product. It was I don't think it was, it was a US company, I believe and it had one major product. It was a US company, I believe, and it had one major product and I cannot judge the actual quality of the product because I have no idea of the sector and you either have to work in the industry or you have to research it for years, because how can I judge how good a biotech company or products of a biotech company are, while in Germany and in European countries, if they are more local brands or production companies, it's a lot easier to go just through the balance sheet, through the income statement, and get a pretty good idea of how well the company does, because there's a lot more tangible value and a lot less intangible value. That's an advantage and although I'm not invested in a German company at the moment, I do like that advantage when I look'm not invested in german company at the moment. No-transcript.

Speaker 1: 19:37

In this stage. Everyone always talks about the Fed and liquidity as the biggest driver of why markets are doing what they're doing. Is there an equivalent when it comes to German markets, to European markets? Is the sort of narrative around. Well, what the ECB does is all that matters for local markets, or is it much more idiosyncratic, based on more micro as opposed to macro?

Speaker 2: 20:03

I would say it's definitely more micro. I think the entire culture of the stock market is entirely different. In Europe, for example, you have TV shows like CNBC and there's nothing like that in Germany. If you watch TV, you will never see anything about the stock market. I think there's a like that in germany. If you watch tv, you will never see anything about the stock market.

Speaker 2: 20:20

I think there's a five minute segment um before the. In germany there's one big news outlet and it sends the news at 8 pm in the evening and I think about don't I may. I don't know the number maybe 15 million people watch it, maybe 20, 20 million. So it's just one news outlet. I think in the US it's Fox News and there are different ones. So five minutes before that, I think there's a five-minute segment about stocks. That's the only thing you will see. It's very neutral. It's very just kind of descriptive of what's happening, but nothing more. So if you run deep into the finance industry or the finance bubble, no one has an idea of what the ecb is doing and they definitely do not think about it in terms of how the hidden champions that I just mentioned will perform. It's a lot more based on microeconomics and a lot less based on macroeconomics, which might be one of the reasons why I'm kind of prone to that investing strategy.

Speaker 1: 21:24

Do you think that makes things easier, just because there's less noise?

Speaker 2: 21:30

I think it makes things a lot easier, although I also think that's the reason why our markets are small, because there are a lot less people participating in the markets in the US, I think at least that's the idea I have of it. That's kind of what I hear from the US, that pretty much everyone is owning stock and it's basically a market that the entire country is participating in, while in Germany stocks are maybe in my generation it's kind of shifting right now, which is a good thing, definitely. But especially in the generation of my parents, stocks were only for rich people. They were for no one else. They were for rich people and no one maybe touched them. They just thought of it as speculation. I think that's pretty much also because there's no um, no shows on it. There's nothing that covers it and daily news or anything like it.

Speaker 2: 22:25

So, while it might help if you actually find into the or if you get into the space, it might be an advantage, but getting into the space in itself is a lot more difficult, I would would say, which is not a good thing.

Speaker 1: 22:43

I would think the other part of this is, for lack of a better way of saying it, maybe it's kind of lonely to be a trader or investor because you don't have as many people talking about it, maybe not as many sort of communities to easily find and join right to pass ideas along. So how do you go about finding some like-minded people just for idea generation, just to try to get, um, get some feedback from others that are also trying to invest?

Speaker 2: 23:08

well, that's actually one of the um, one of the reasons I started on x, because, um, even when I get to university, I mean there are some clubs that are about investing, but maybe those clubs are also focusing on what I said in the beginning. So if you ask large caps and it's kind of superficial I would say the value space, for example, in Germany, is incredibly small. It's probably the entirety of Europe. It's very small and only 10 times the size in the US entirety of you, but it's very small and only 10 times the size in the US. So that's also one of the reasons I started on X and social media in general, because I thought, on the one hand, I can explain to people and, on the other hand, I can meet people that kind of are interested in the same things, that I can get ideas from, and that's one of the main reasons I started out.

Speaker 1: 23:53

Basically, all right, let's talk about um weightings in your portfolio, right? So if you're sounds to me like if you're following more sort of value, longer term approach, a monger buffett type mindset, you're gonna buy and you're not gonna trade, you're gonna be much more. You know patient, right, maybe trimming here and there, but for the most part you've got your core thesis and you hold it. But presumably you're also doing research and you're finding new ideas that might get you even more excited. But you've already positioned your portfolio. You've got so much cash. So when you have your initial portfolio, your initial idea is your allocation and suddenly you have a whole bunch of new things that are getting you excited. What do you do? Do you sell off your prior positions, which you might still like, or do you just wait or do nothing?

Speaker 2: 24:44

That's actually a great question because that's basically the question I'm. I don't have an answer yet because that's what I'm currently thinking about, because I'm currently in a situation where I have, I think, about six or seven positions and I'm pretty happy with most of them, but I'm lacking cash to advocate or to kind of add positions or maybe switch positions. So that's the first time I actually have to face opportunity cost and that's a pretty hard question to answer because I kind of feel like I'm, as you said, in the camp of concentrated portfolios. But that was also coming from a perspective when I was still a large cap investor not only the opportunity but maybe also the necessity to switch and maybe add more positions for you Because, like I said, migrant small caps are a lot more volatile in their fundamentals, in their business, and if that's the case, diversification gets more important. I think you say about eight stocks and then you have marginal utility from putting more stocks into your portfolio. But in the end, if you're on micro and small caps, I've developed the tendency to trade more.

Speaker 2: 26:10

To your question, I trade more than I did before because oftentimes you have situations where you have a clear price target and you say there are two catalysts and price target x. Then I put it into my journal and when these two catalysts play out and price target x is um, sit and I have two, um, two things that I do. I look at the opportunity again and I think, okay, did the company get so much better? Then I can still have it in my portfolio and it will perform even better. Then I have to kind of update my price target and the catalysts or the story in itself, or I just sell when I sell. The good news is I've made a profit, hopefully, and I have kind of place for new opportunities. And currently, maybe one position that I can mention it's the only large cap that I own and it's Alibaba. It's still there from the days where I was invested in large caps because there's still opportunity. But, as you might know, the opportunity costs of Alibaba got higher and higher. So that's one position where I started or where I'm um about to initiate trimming the position.

Speaker 2: 27:22

So I have money for other positions to add and in general I would say I don't like the idea of labels.

Speaker 2: 27:30

So while I say I'm a value investor, that doesn't mean that I don't need a price to book or anything like that I still. I have the philosophy of a value investor, but I don't limit myself to the investment and I want to have the same kind of freedom when I say, okay, this is how I structure my portfolio. So if I have six positions and my goal is to be concentrated, I still do not want to limit myself to at a seventh position when I think there's a big opportunity and maybe I don't know yet if there's a better opportunity than maybe the position that I have, the smallest or my smallest position in the portfolio right now. Maybe I don't know it yet, so maybe I turn another position, add to the new position. So I have several positions now and then by the time I can learn more about the stock, I can kind of re-evaluate if it's a better performing stock or a stock I'm just feeling better about, and then I would have to cut another stock out and kind of bid a position or make it larger.

Speaker 1: 28:36

If you're talking about having a concentrated six to seven positions, are they in different industries or sectors? Because there's two types of concentration, right. One is in the company, the other is in the sector that the company's in Usually. You know, I think a lot of studies show that the vast majority of returns can be explained away more so by sector movement than idiosyncratic movement. So it has to be considered right. Then again, you have exceptions to that, like NVIDIA, which basically is the semiconductor momentum. Right now, Most of those semis are not kind of behaving. So how do you think about sort of the sector concentration within that portfolio?

Speaker 2: 29:15

That's an important part, because I think, from what I own right now, I've diversified geography. So I have two or three positions that are placed in europe. I have two or three positions um I think two at the moment that are in the us and, like I said, I have alibaba, which is, of course, china or an asian play, um. So geography is something that I would diversify, although I have to say, um, us and europe kind of move along, at least if you talk about the macros. So it's a question of how diversified it actually is. I think I would also be okay with a portfolio that has only European companies or US companies, because I don't care so much about volatility.

Speaker 2: 29:57

What you mentioned is what's more important might be the sector. So, especially if I have a sector that's very depressed or a sector that has a lot of hype, for example, semiconductors although, as you mentioned, it's also about concentration in the semiconductor sector, media performs pretty well, while other companies might not. Media performs pretty well while other companies might not, but, in general, I think about how, how much of how concentrated is an industry and how concentrated am I in industries that are either very expensive or highly priced and some that are very cheaply priced. That's what I look for. But I'm like I said. I still do not have a label or kind of a limit that I would say I would never own only five companies and all those five companies are in the same industry. If I believe, because of my research, that they are great opportunities, then I do believe they are great opportunities.

Speaker 1: 30:51

I just have to consider the risk that comes from being in the same industry when you're doing, um, your analysis on microcap companies in particular, um, the challenge, as you know, is where to even get the right information. And then, yes, there are certain standards when it comes to accounting, both in the us and germany and other european countries, but it's hard to get full transparency. Arguably, how do you know if you can have conviction, not in the analysis that you're doing, but in the inputs?

Speaker 2: 31:31

Well, that's one of the reasons why I would say I wouldn't invest in micro, small caps, for example, that are based in China, because in China and Asia in general although there are some countries that might be different I mean Japan, for example could be different, but I need to have the feeling that I understand the company and when I understand it, it's also part that I think the numbers are realistic and they are correct and I, for example, would only invest in very small or micro companies in the US or in Europe, because I know about the regulation and I can be pretty sure you never know 100%. You cannot know that. That's also one of the risks that you have to face if you invest in micro and small caps. There can be companies, especially if they look very good maybe too good to be true, then well, actually, they could be too good to be true, then well, actually, they could be too good. So, um, it's a risk you have to take, a risk that you don't have in large caps, because they I mean the risk is never zero percent, but in large caps it happens a lot less.

Speaker 2: 32:34

Um, because the regulation is different, they are on a much bigger scale, so it's harder to kind of fake numbers or change them. It's a risk you have to take and that's well. I think the only thing that I can do is, um, looking where to invest, which is us and europe mostly and also kind of staying away from situations that are too good to be true. I mean, sometimes you look at numbers and you feel like those actual numbers, then the stock market will work to them very shortly and maybe you have passed out on an opportunity. But when I feel like whatever I'm seeing there seems too good to be true, then I just stay away, even if they are in Europe, even if they are in the US. But you can never really know 100%. That's just the wisdom that comes with investing in these companies.

Speaker 1: 33:27

So I'm curious if you think that some of these AI momentum names, at least in the US, and their earnings, if those are too good to be true, or if it's just excessive optimism based on a narrative, put the value haton when it comes to this AI story.

Speaker 2: 33:47

I am mainly talking about large caps or small caps.

Speaker 1: 33:50

Primarily large caps, it seems like, at least in the US, to your point it's largely now. The S&P is not really an index. It's driven by a select number of thoughts that are maybe too good to be true pricing in this AI future which may not pan out as much as everyone thinks.

Speaker 2: 34:05

Well, I have to be honest, I haven't done too much research on the topic because, like you said, I think it's too good to be true, at least from where the stock prices already are.

Speaker 2: 34:14

So those are not opportunities that I that I currently would look at.

Speaker 2: 34:20

If the numbers are true or not, I think I mean there's a difference between if they're actually just false they call out numbers or say numbers that are not the case or if there are numbers that look better than they actually are, because maybe you have the growth that should be or would be otherwise um three-year growth.

Speaker 2: 34:39

You have it in just one year because of the current sentiment, because of of how investors see your company and how willing they are to give you the money, so maybe that you can spend a lot more money on advertisements. So your revenues are kind of revenues that normally would have in the future. You kind of pull them to the present. I don't think that's already something that you would call those numbers are false or wrong, but it's something that it's not sustainable itself and I think most of the stuff you see in AI currently I do not think it's sustainable, although I have to say that I just currently saw a statistic, I think even in ai itself, it's just a handful of companies, or maybe 10 companies, um, that actually show fundamental strength based on the ai and other companies that use ai a lot, their earnings cards are that they have no sign of any fundamental change within the company.

Speaker 2: 35:39

so I think there's a little bit of a bubble there, but I'm not researching any stops there, so I think my opinion there is pretty limited.

Speaker 1: 35:50

Let's get into some recent war stories. What is a company that you bought into that disappointed you, that somehow your thesis changed and and you decided to take the loss. Uh, and then the other side of it, which is you know what's a recent company you've allocated to that has surprised you in terms of maybe your thesis playing out faster than you thought it would okay, I'm not so often talking about companies that have my portfolio, apart from a website, just because I don't want to mention too many companies without having the research just added On my website.

Speaker 2: 36:29

I can do that. An interview like here I can't. But there are two companies that I already mentioned where I would say it's a mistake. The one that was a positive surprise to me, at least it fulfilled all the things that I've seen in the uh thesis. Maybe let's start with the positive um. It's actually an italian company. It's the holding company I mentioned earlier. It's called italmobile. Um, probably I messed up the pronunciation uh in italian, but I think they will forgive me.

Speaker 2: 36:59

Um, and that's a company where the idea was that they buy companies, and they're not buy and hold them, but they buy it, they get a new management team in or they kind of better the operations or improve them and then eventually they sell the companies. And I wasn't sure when I got into that company, because if there's a management team that says to you it also traded at a 50% discount to NAB, but once again, it's a holding company, so there are some people who say there needs to be a discount because it's a holding company and it's difficult to release the value of the company. Some say there should be a 25% discount, others say there shouldn't be one. At least if you have a 50% discount to NAV and the company or the management seems to be capable of actually improving the companies they have under their umbrella, I think that's too much. So the idea was that NAV, or the gap between value and NAV, the stock price at NAV, would close, which was the case. It did close and at the same time, management really delivered on improving the company, the companies under their umbrella. They have strong brands that I like very much. I mean, if anyone wants to read about it, like I said, it's right up on my website. There are also some updates already.

Speaker 2: 38:27

That was a very positive experience and although maybe I'll add that one, it's pretty hard to say just because you made a positive experience in such a company once that it's something that I would do again and again. I think, especially with holding companies, you kind of have to get a pretty good feeling of the people who are running it, and what often helps is to just maybe make a small investment and then look how the company just a small investment to have it on your radar, because if you think, oh, there was this company, but you are not invested, then you probably forget about it and you do not follow up on the news. So maybe have a small position, then follow up on the news, see how things are actually evolving. Then you, if you think it's it's doing good, then you can get in again. So, holy, companies are kind of difficult, but this one turned out pretty well, so I'm happy with that.

Speaker 2: 39:22

And a mistake maybe get lucky with a lot of positions currently, but the only big mistake big mistake but is alibaba, just because I think I broke some rules although it's an old investment of me, for me but I broke some of the words that I kind of had. For example, I want investments in macroeconomics to not play a big role or an essential one, and I think I messed that one up in Alibaba. I don't know, maybe you're more of a macro guy. What's your opinion on China and CCP and investing in China in general? I would be interested in that.

Speaker 1: 40:02

There's a price for everything, right? I mean, that's the first way I'd start off my response to that. In the States at least, there is a natural aversion, like financial advisors, asset allocators. They don't want to have China anywhere near in the statements that they provide to their clients, because there is a perception, which I think is largely valid, that China is rogue when it comes to investing because they can shut entire industries down, as we saw a couple of years ago with the tutoring side, and that they confiscate assets. It's not a free economy and all that's valid.

Speaker 1: 40:43

And the reality is China's markets have not done anything for the longest time. But again, because there's a price for everything, you would think there is some level for the average stock in China where it's overly discounted, all of those dynamics which people are afraid of. To begin with, it's not an argument to go and invest in China right now, independent of the economy. But if everybody is disregarding companies from the second largest economy in the world, I would think that there's opportunity that things are mispriced. And if you're a real value investor, you may want to actually consider some kind of allocation, which I think is why I think Alibaba does make sense.

Speaker 2: 41:28

I mean, from a lot of perspectives, exactly, I mean, I think that's basically the opinion I had and still have. I mean, I still own it, so I'm not bearish on that company, otherwise I wouldn't own it. If you just look at the numbers, I think alibaba is like 10 pe for the 2024 earnings. It has um 80 billion cash and market cap of I think right now it's 185 billion or something like that. So the numbers all look pretty good, um, what I think it's interesting is, for example, that we talk a lot about the macroeconomics and how they impacted Alibaba, but there are companies in China that did pretty well. Pdd is an example. I think PDD is up over 90% over the last 12 months, while Alibaba is down minus 9% or 10%. In the same time and they are pretty much in the same industry they are very close to how the company model works. Although there are some differences, they are as close as it gets.

Speaker 2: 42:28

And while many investors are saying that alibaba is uninvestable because of china and everything the ccp did, not only to alibaba but the sector in itself and the tensions between china and the us and china and taiwan, there are still companies that perform pretty well, although they have the same kind of problems like PDD, and on the one hand, that gives me hope is maybe the wrong word, because you shouldn't hope an investment goes well. There should be a clear idea that you have. But at least it's a bit weird to me how a company that's so close to Alibaba, for example, can have such a great development. Also, judged by the stock price, alibaba is so extremely undervalued. I feel like there's almost kind of a situation where Alibaba is the most famous Chinese company at a time where China started to have all these problems and troubles. So I think Alibaba is kind of the poster child of those problems that China had and the stock market had, and so that's why I'm still bullish on it in general.

Speaker 2: 43:37

But, as you just asked in the last question, I have to consider it a mistake by now, not because I lost a lot of money, because I think my buy-in price on average now is about $74, $75. So I'm not in trouble on that one. There are opportunity costs. I think I have it in my portfolio now for quite a long time and I've come across a lot of good opportunities since then, especially in the micro and small cap space, and those were opportunities where I sometimes couldn't put money in, because I still had this Alibaba situation and it still looks so good on paper that I don't want to kind of close it down, and at the same time the opportunity costs are getting bigger. So I would consider it a mistake, although I's still rather bullish on the company itself.

Speaker 1: 44:28

You mentioned opportunity costs a few times and we know from behavioral finance that the most powerful emotion is regret, and Daniel Kahn talks about regret aversion quite a bit in some of his work. How do you manage your own emotion when you have that regret, when you're thinking about ah, this is a dead money stock and I believe in it, but I could have been in Nvidia, I could have been in Microsoft, in Apple the other day, because I find the problem is the moment you, you go down that rabbit hole. Not only is it not healthy for you, but it causes you to maybe over trade as well I think it's funny because I mentioned opportunity, because now, a lot.

Speaker 2: 45:12

But I think I mentioned it because I basically have a lack of regret in general. Um, I barely have any situations where I would go back and I think like, oh, I should have been in that stock or maybe I should have got out of that stock. That's probably something where I would feel more regret if it happens. But I barely have situations where I feel like I was supposed to be in that stock Because, like I said, I write an investing journal and even if there's a pretty convincing opportunity that I end up not being in, that's still something that I write down and so I know my reasons for not joining in that investment. So I barely have regrets to that end. But because opportunity costs is a real thing, I try to focus more on it nowadays. That's why I mention it so often, because that's the thing I'm most neglected.

Speaker 2: 46:04

I've neglected the most in the past because I always felt like I don't have these kind of regrets and if an opportunity is working out now, then maybe, maybe it's working out next year.

Speaker 2: 46:15

I'm so young, um, that I still I'm very aware of kind of the maybe, naivety or what it is that I have to wait longer Because I have the time to wait and I have so little experience that I cannot get kind of shaky when an investment is moving for six months. So I would rather wait out two or three years because I know that's how long it can take, though it seems wrong to me. I'm only investing for five years, so if I have to wait three years until an investment's playing out, it feels like a very long time, but it actually isn't. That's how the markets work. So I would say I more have a tendency to let or to have things in my portfolio for too long, which might be a good thing because I do not have these kind of regret situations but I also want to focus more on the opportunity costs. If that's a mistake, for example, on Alibaba, I would say that's the first situation where I would actually consider it a mistake to position that size for so long, although it's not moving.

Speaker 1: 47:32

Daniel, as we wrap up, for those who want to track more of your thoughts, more of your work, remind them where they can find you.

Speaker 2: 47:40

Yeah, like I said here on X, on x, I think streams on both channels right now. Um, you see the handle, um right down here and on my website too. Um, I would yeah be happy if you join there, and I'm also on linkedin now. I think it's the same handle or maybe it's mnke and then daniel instead of daniel mn, but I think you will find it if you look for it. Once again, thanks for having me here. I was a bit nervous. It was my first experience on any type of podcast, especially now it's live. I think you did a great job of getting me through here.

Speaker 1: 48:19

I look forward to you doing more of these with other hosts. I think you've got a bright future. So, everybody, please make sure you support and follow Daniel and hopefully I'll see you all on the next episode of Lead Lag 5. Thank you, daniel, I appreciate it. Thanks for having me. Cheers everybody.