Youngest Portfolio Managers in Europe: A Look into their Successful Hedge Fund Management Techniques

What is your background?

Tobias: Our journey as entrepreneurs began right after I graduated from high school. Initially, I started attending university classes, but it soon became apparent that our time was better spent building our company.

Jakob: Some might say that our background isn't the most conventional for a career in finance, but after completing my bachelor's degree at the Vienna University of Economics and Business, I decided to take a chance and start building our own company with Tobias. I was in the midst of my master's degree when we made the decision to fully focus on our company.

Tobias: Currently, I'm considering starting a master's program at the Columbia Business School in New York (when time permits). We were inspired to apply to this specific university because we had the opportunity to attend investing classes by Bruce Greenwald and Tano Santos, where we learned invaluable lessons. If you're looking for an informative class, you might be interested in this one, which is similar to the one we attended. It promises to be a worthwhile and enjoyable learning experience.

When did you start investing? How and when did you find your fund?

Jakob: Our introduction to investing was heavily influenced by our father. He inherited a wood manufacturing company from our grandfather, but eventually decided not to expand the business due to increasing market competition. He began exploring different investment opportunities and became interested in Warren Buffett and value investing. It just made sense to him.

Tobias: Our father faced challenges at the outset of his investment journey, as he acquired his first Berkshire Hathaway stocks in 2007, just prior to the financial crisis. Thanks to his commitment to a long-term approach and his ability to remain patient and disciplined, he was able to take advantage of attractive buying opportunities that arose as a result of market turmoil. He imparted to us the principles of long-term value investing and assisted us in building our own investment portfolio. As a result of our efforts, we have been fortunate enough to win several stock picking competitions and have received three cars as prizes.

Jakob: Today, we look for interesting investment opportunities for our father's company and for our clients (who we work with through managed accounts). If we find any, we invest in them for ourselves and for our clients.

What was your biggest investment mistake you have made? And what did you learn from it?

Jakob: Of course, we've made mistakes and bought stocks that didn't perform as well as we would have liked. In one instance in 2021 when we started buying Chinese stock Alibaba (we are down about 60%) we were not generous enough in estimating the fundamental cost of capital and, therefore, our margin of safety was not sufficient. This is a mistake that we think many excited investors fall into when valuing growth stocks. Thus we have learned that one should always use a conservatively high cost of capital and only buy if the expected return is quite a lot higher than it. But overall we are happy with our investments. It's all about the big picture: Some investments will do better than expected and some will do worse.

Sometimes I think about missed opportunities. We wanted to invest in Suncor Energy Inc during the low oil prices of late 2020. But at the time, we were not well-informed about the company and had concerns regarding its high debt level. However, I believe that similar opportunities will present themselves in the future and it is important that we are prepared and take the time to thoroughly research and understand them before making any decisions.

Who are the best investors you follow?

Jakob: Obviously, Buffett and Munger are absolute masters of value investing - there's no denying it. Even though Buffett is a household name, I still think a lot of people underestimate just how brilliant he is. If you take the time to read his annual letters (book: The Essays of Warren Buffett) or look for the Berkshire Annual Meetings on Youtube, it's easy to see his brilliancy. And while Munger may not be an investor in the same way that Buffett is, his diverse expertise is incredibly valuable when it comes to navigating life. The great thing is that even if you're not interested in investing, you can still learn a lot from these two, because being a good investor means understanding life itself.

Tobias: For those seeking to master the art of value investing, Bruce Greenwald is an invaluable resource. While it's true that Warren Buffett doesn't reveal all of his strategies, Greenwald has made it his mission to decode the thinking behind value investing. His book “Value Investing: From Graham to Buffett and Beyond” is a must-read for any serious investor. Just be sure to get the second edition for the most up-to-date information!

Where do you get investment ideas?

Tobias: I really enjoy reading write-ups on valueinvestorsclub.com. In my opinion, you can learn a lot just by reading what successful investors are interested in. However, these are not our only sources. Websites like strike.market provide excellent overviews of different industries and companies. We use these sites to research competitors in specific countries or industries.

Jakob: One of my favorite approaches is financial reengineering: we look at what successful investors have invested in the past and try to understand their reasoning. If it makes sense to us, we dig deeper. On strike.market one could see the positions of famous investors. For example, Value investor Li Lu saw potential in Micron Technology, a chip manufacturer that initially puzzled us. But after a year of thorough research, Tobias finally unlocked the key to understanding the company and we started building a position in September 2022.

What is your investment strategy?

Jakob: My favorite companies are the ones that are still growing organically, but aren't priced for any growth due to a saturated market. For instance, we were able to purchase shares of Apple in 2018 at a price-to-earnings ratio net of cash of around 10. While this may seem unlikely in today's market, there are still excellent opportunities for investment, such as Meta and Alphabet, at similarly favorable valuations.

Tobias: The beautiful thing about being an investor is that one can choose which competition to participate in. We are not the investors that have fortune teller equivalent skills in finding what the best product is, or the best culture or where the employees are better than at another company. However, also because of thoroughly studying Greenwald, we think we have an edge, in finding inefficiencies arising due to errors in weighing the variables. It is surprising to me that many investors seem to understand a lot about a company qualitatively and then miss to accurately put the right numbers on these observations.

Jakob: We love it, for instance, when we find companies where a rather negative development is clear to us but people vastly overestimate its impact. Meta Platforms is a perfect example at the moment. It is currently common for investors to focus on the expenses for the Metaverse, while overlooking the success and potential of existing platforms such as Instagram, Facebook, and Whatsapp. Everyone focuses on the Metaverse and everyone ignores the beauty of Instagram, Facebook and Whatsapp. This often happens when companies do a lot of R&D in non-core businesses that should be seen as investments rather than costs. Even a failed investment substantially differs from a cost. Also in Micron’s case, many investors focus on growth, where due to its very low market cap to invested capital ratio, growth through reinvestments does not matter a lot.

How concentrated is your portfolio? How many stocks do you hold?

Tobias: Our portfolio is highly concentrated in a select group of high-quality companies, with a particular emphasis on Berkshire Hathaway that represents approximately 30% of our holdings. This company is expertly led by Warren Buffett, and we consider it to be a virtually fee-free ETF. Our next largest holdings are in Alphabet, Micron, and Meta Platforms.

Jakob: In 2020 and 2021 almost every investment had spectacular returns. In this market we were not finding attractive opportunities. So we were having a large cash position of around 60% at the beginning of 2022 when prices were becoming more interesting. However, we were able to identify excellent companies at attractive prices during the recent market downturn, and as a result, our cash position is now below 20%. We feel confident in our current level of investment, and if markets continue to decline, we have the ability to allocate additional funds as needed. We should note that this is not timing the market in a traditional sense. But having a fundamental approach, cash will naturally be higher when the market is pricey, as opportunities are scarce. So we can time the market without timing the market.

Tell us your 2023 outlook

Tobias: Not even we ourselves trust our short-term predictions.

What were the biggest/most significant changes in your portfolio this year?

Tobias: One of the most significant changes to our portfolio this year has been the reduction in cash holdings, from approximately 60% to less than 20%. In addition, we made a strategic decision to invest asymmetrically in lower growth technology stocks like Alphabet and Meta Platforms. While rising interest rates can negatively impact the value of growth companies, these technology stocks were not valued for their growth potential and have also experienced significant declines - despite the potential for less severe impact based on the underlying mathematics.

What is your ROI YTD? And what is your ROI since the foundation of your fund?

Jakob: At TIP, each investor has a separate account and therefore a different return on investment. To calculate the overall performance of the fund, we use a synthetic fully invested approach where we set target percentages for each stock and adjust these percentages when adding new investments. Since the inception of the fund, this approach has resulted in an annualized ROI of approximately 5%. However, the year-to-date return for these accounts is currently slightly below -10%. Our fee structure is set up so that customers do not pay any fees unless we achieve a return higher than 6% per year, and in that case, we receive 25% of the excess return above the 6% hurdle rate. As a result, it is likely that we will not be issuing any bills for fees in 2022.

Tobias: It's important to bear in mind that these results are based on a limited time frame. Our family business, on the other hand, has achieved an ROI of approximately 17% per year since its inception 15 years ago. Despite this strong overall performance, the YTD return for our family business is currently at approximately -15%.

Jakob: Tobias and I have also been managing our private accounts since 2009, and we have achieved similar returns to those of our family business. It's worth noting that these returns can be attributed to the expertise and guidance of our father, who has been instrumental in our success.

What is the best performing stock in your portfolio currently?

Jakob: Berkshire Hathaway. Doing a simple sum of the part analysis, the stock which was our biggest position percentage-wise has proven to having been significantly undervalued. This was because pre-Covid, many investors have given up upon value stocks. So our performance till now has been great. Thus, we think it is not as undervalued anymore, so it is not expected to yield returns in excess of 10% in the long term. However, we believe that its returns will exceed our required return. Due to Buffett’s and his team’s managing capabilities, it is a stock which we think could deserve a premium, so we are not eager to sell it, especially since it is a valuable tool for diversification and risk management.

What is the worst performing stock in your portfolio currently?

Jakob: Our worst performing investment till now is Alibaba, a company in the Chinese retail sector that we believed was cheap compared to its growth potential, but it ended up underperforming due to changing political conditions. We, however, remain committed to holding our investments in China. In fact, we continue to add to our holdings for new investors, as we believe the value to price ratio has not decreased. While investing in China carries risks, we believe that not investing in China carries risks as well. It is crucial to maintain a balanced position and, when fortunate enough to find a high-quality company, to hold on to it with patience. Despite any setbacks we may have encountered, we have learned valuable lessons about the importance of thorough research and the constantly evolving nature of the market and specific regions. One always needs a generous margin of safety!

Which stock do you believe has the biggest potential in your portfolio and why?

Tobias: We like all of our investments and do not think in terms of potential, but always potential in relation to fundamental cost of capital, which is the return that we subjectively require from an investment. Our expected return should always be quite a lot higher than the required return. We don’t size holdings by looking at their potential but by using their respective required returns. The higher the required return, the lower the percentage invested. This often leads to the companies having the biggest potential being the smallest percentage.

Which sectors do you believe will outperform in 2023 and 2024?

Tobias: I am currently interested in having a further look into certain semiconductor manufacturing stocks. But I cannot speak for the sector as a whole. Also, we are overweight some low growth technology stocks, but I really do not have a view of it as a whole.

Which stock(s) do you believe will double in 2023?

Jakob: We could name many investment opportunities that may have the potential to double because when doing our stock picking contest this question was the most important. Unfortunately, a high percentage of these companies have gone bankrupt. While we may be able to identify individual stocks that have the potential to double, the overall return on our investment would likely be less than desired due to the high risk of some of these companies failing.

What do you believe will be the next black swan event in 2023?

Tobias: If you looked at the last black swan events like Covid and Russia/Ukraine all of them were impossible to predict. Rather than betting on such events, we try to not bet on them. To mitigate the risk of losses from these types of events, we focus on owning companies that have the financial strength and resilience to weather difficult conditions and adapt to change.

What is the best stock for the long-term to buy?

Jakob: If we wouldn’t manage money and look for undervalued and amazing companies, we would probably just buy the stock of the best value investor of all time - Warren Buffett. A well diversified portfolio with wonderful companies and almost no fees. Although it won’t provide you with spectacular returns it is able to perform better than the cost of capital.

TIP - The Investment Partners

TIP - The Investment Partners was founded by Tobias and Jakob Schober and is a portfolio management company. TIP specializes in equities and Warren Buffett's value investing approach. After winning several stock picking contests, the young Austrians launched with their separated accounts approach and Buffett-style fee-structure in February 2020. Their favorite companies are the ones that are still growing organically but are not priced for any growth due to a more saturated market.