THRIVE
HELPING IDEAS
TO CREATE A BETTER FUTURE
SMART
PEOPLE
PARTNERING WITH
TO SOLVE DIFFICULT
PROBLEMS
OUR PRINCIPLES
Focus
Distractions are abundant and easy to fall prey to, making it all the more important to stay focused in order to improve over time.
Our focus is specifically on innovative companies. Investing in early stage companies doesn’t need to be in conflict to value investing. We adhere to these principles and place a strong emphasis on risk aversion.
Understanding the companies we invest in, and remaining within our circle of competence, is of the utmost importance. In an era marked by rapidly accelerating disruptive technologies and business models, we strive for continuous learning and the gradual expansion of our boundaries.
Patience
Focus
Culture "HAILGIP"
Independence
Do Good
Embracing the Miracle of Compounding
Few Bets, Infrequent Bets,
Big Bets
Risk versus Return
Use a Latticework of
Mental Models
Markets are Wrong
Pay Attention to Incentives
Getting the Investment
Process Right
Know When to Sell
Be Conscious of Leverage
Be the Last Man Standing
Culture "HAILGIP"
Our corporate culture can be summarized under the acronym “HAILGIP”. It stands for:
Honesty
Authenticity
Integrity
Love
Giving
Intelligence
Passion
These are the guiding principles we use in our interactions with investors, partners, and colleagues.
As Michael Eisner points out in his book, 'Working Together: Why Great Partnerships Succeed', the best way to find a great partner is to be a great partner. This has proven true for us in all areas of our life, and it is a characteristic we admire in others
Independence
Being truly independent is paramount and runs deep in our DNA.
We are continually searching for new investment opportunities that meet our criteria. In this process we focus on our own research and our own processes. We listen very selectively to other investors and people for whom we have good reasons to respect. Our geographic set-up was chosen to allow for easy access to companies where needed and to avoid the herding mentality found in big financial centres.
We pay particular attention to psychological biases that may impact us. While we are not immune to them, we strive to constantly improve and implement processes that guide us away from heuristic shortcuts.
Patience
While short-term market swings impact prices, it is the real fundamentals that govern the long-term return of a company. For a listed company, our preferred investment horizon is more than 5 years – mainly to harness the profound effects of compounding. As for our VC investments, we invest alongside the entire time frame, from seed stage to going public and becoming listed entities.
As Warren Buffet says, “The trick is, when there’s nothing to do, do nothing.”
Infinite patience to act doesn't equate to idleness. It provides the time to learn, search for new ideas, and prepare for the right moment to act – when we see something that makes sense – we act swiftly and with conviction.
Do Good
At K Capital Ventures, one of our primary aims is for our investments to ultimately benefit both the planet and society.
The Friedman doctrine of shareholder value resonates strongly with us. However, we believe it doesn't have to be in contradiction with other objectives, but rather, it should serve as a solid anchor within a broader set of purposes.
Our goal is to support the financing of companies that can succeed in business while simultaneously benefitting society. In our opinion, sustainability is vital for securing the long-term viability of businesses and hence for successful and responsible investing.
Embracing the Miracle of Compounding
Power laws govern our lives, yet most people struggle to understand how non-linear relationships amplify results. We founded K Capital Ventures with the objective of investing for the very long term.
The table below illustrates the point that seemingly modest differences in an investment's annual rate of return can lead to significant differences in the ultimate gain over lengthy periods.
Big losses are the real detriment to returns. The key to compounding our wealth at the highest possible rate is to minimise the probability of a permanent loss of capital. As the following table illustrates, the more you lose, the harder it is to simply get back to where you started.
Few Bets, Infrequent Bets, Big Bets
Capital Markets operate like a parimutuel system. This means that superior companies are usually priced higher than weaker ones. The real skill lies in identifying the mispriced ones. This task is much more difficult, and the opportunities to place such bets are much rarer, than most people believe.
Fortunately, there are some trends working in our favor:
Passive investing and ETFs are becoming the dominant groups of investors – moving many stocks in sync. Although momentum often lasts for a long time, these trends provide a pool of opportunities. Regulatory changes like MiFID II are expected to result in a consolidation of sell-side research, potentially reducing coverage in the small and midcap segment.
Disruptive technologies are accelerating, destroying existing business models, creating new ones at an ever-faster pace. Identifying mispriced assets requires deep analytical understanding and a sensible approach to valuation. The latter is more art than science, as there is nothing precise about the future. Incorporating reasonable assumptions, leaving a wide margin of safety, and securing a highly favourable return-to-risk profile are good starting points.
The implementation of AI tools is likely to further increase efficiency levels. In the efficient areas of the market., humans are expected to be outpaced by AI over time. However, humans should prevail in the inefficient segments, and nothing is more inefficient than venture capital and startups.
Companies whose share price can increase 10x to 100x – at low risk – are very rare. When we find them, we aim to invest significant amounts.
Risk versus Return
The general view is that the higher the return, the higher the risk. This implies that investors who expect higher returns must accept greater risks. However, we disagree with this notion.
Howard Marks introduced an interesting variation on this simplified view by adding the concept of a Probability Distribution of Returns. Riskier investments have a higher potential return, but it's far from guaranteed. By the same token, if the analysis is correct, it's possible to purchase assets that generate the same return at lower risk levels. The ideal investment is one that is heavily skewed towards the upside with only a modest downside risk
Use a Latticework of Mental Models
The idea for building a “latticework” of mental models comes from Charlie Munger. Munger’s system is akin to “cross-training for the mind.” Instead of isolating ourselves in the small, limited areas we may have studied in school, we study a broadly useful set of knowledge about the world, which will serve us in all parts of life.
The models must come from multiple disciplines – because the world’s wisdom is not found in one narrow academic discipline. Rather, it is the big, basic ideas of all the truly fundamental academic disciplines. The mental models approach inverts the process to the way it should be: learning the important subjects deeply and then using that powerful database every single day.
Markets are Wrong
We do not subscribe to the Efficient Market Hypothesis.
While markets are quite efficient most of the time, they certainly aren't always. Ben Graham’s analogy of the manic-depressive 'Mr. Market', who can be wildly overexcited one day and deeply depressed the next, serves as a great mental model.
We need to make the market our servant, not our master – using it to our advantage to purchase bargains when pessimism reaches extreme levels and to mitigate risk when the crowd is overly exuberant.
Pay Attention to Incentives
An important component of the set-up at K Capital Ventures is to ensure that our incentives are properly aligned with the interests of our business partners.
The investment business is full of people trying to push ideas that serve their own interests. We adopted a simple rule: we don’t let ourselves buy anything that’s being sold to us.
In addition, we are highly sensitive to company management incentive schemes, as well as the business models of the companies we invest in.
Getting the Investment Process Right
We are passionate about the process of investing, but we maintain critical distance from our investments. It is very important to be able to walk away from any individual investment and not to fall in love with it.
Mark Twain makes the point: “What gets us into trouble is not what we don’t know. It’s what we know for sure that just ain’t so.”
The process of investing includes searching for investments, measuring their value, buying at the right price, monitoring and eventually selling. Critically, it also means reviewing mistakes. Buying and selling, the steps most people focus on, take but a moment. Searching and monitoring are the most time intensive – and are never-ending processes.
Know When to Sell
There are only three instances when we should sell a stock.
The first is when we realize we've made a mistake and a company does not meet our criteria, i.e., our assessment of fundamentals has changed. The second is when a company ceases to meet the criteria – for example, when the share price reaches our fair value, or less capable management takes control. The third instance is when we encounter a fantastic opportunity and the only way we could seize it is by selling something else first.
While these principles also apply to privately-owned companies, in general the opportunities for entry and exit are much more constrained. This necessitates placing much greater emphasis on making the right selection.
Be Conscious of Leverage
The fastest and most effective way to lose money is to risk capital that we don't already own.
Buffett's comment about the implosion of Long Term Capital Management hits the nail on the head: 'Whenever a really bright person who has a lot of money goes broke, it's because of leverage... It's almost impossible to go broke without borrowed money being in the equation.'
We don't use any leverage. In addition, we are sensitive to the leverage applied in our company investments.
As for start-ups, it is paramount to establish the right capital and investor structure from an early stage.
Even large companies with the most desirable business models can suffer tremendously when leverage increases to unsustainable levels and earnings leave little margin for error. The collapse of Dignity, a listed funeral company in Europe, serves as a stark reminder of this.
Be the Last Man Standing
Jack Ma once said: "Today is brutal, tomorrow is more brutal, but the day after tomorrow is beautiful. However, the majority of people will die tomorrow night."
Whether in building a company or investing money, these are highly competitive endeavours. Some individuals pursue short-term glory at excessive risks.
We prefer a conservative long-term approach, striving for consistency and maintaining a high margin of safety. This strategy should not only allow us to do well when others are struggling, but also to gain strength throughout such periods.
CONTACT US
K Capital Ventures AG
Gubelstrasse 24 6300 Zug Switzerland info@kcapital.ventures