🗣️ Investor Talk #21: Luc Kroeze

Author - "The Art of Quality Investing"

Welcome to Investor Talk — where we interview successful investors to uncover their journeys, strategies, and the lessons they've learned. Get inspired by real stories and gain valuable insights to sharpen your own investment approach.

Every interview follows the same set of sharp, insightful questions — such as “What is your investment strategy?”, “What are your highest conviction stocks?”, and “What’s the biggest investment mistake you’ve made?”

In this edition, we have the pleasure of interviewing:

Name: Luc Kroeze @KroezeLuc
Age: 39
Residence: Dutch of origin, but a proud resident of Belgium for decades.
Invests since: 2008 (unfortunately, at the beginning of 2008)

𝗜𝗻𝘁𝗿𝗼𝗱𝘂𝗰𝘁𝗶𝗼𝗻
Since 2008, I've been active on the stock market, specifically since early 2008 when the financial markets seemed to be smooth sailing. That moment, just before the markets plunged in September, was probably the worst time in history to start investing. However, going through the turmoil of a market crash of that scale is a valuable experience that shapes your future in investing. I don't get easily rattled anymore. Since 2014, I have been a full-time investor in real estate and stocks, and in recent years, I can also call myself a writer.

𝗪𝗵𝗮𝘁 𝗶𝘀 𝘆𝗼𝘂𝗿 𝗶𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁 𝘀𝘁𝗿𝗮𝘁𝗲𝗴𝘆?
After years of dabbling in various styles, somewhere in 2017, I discovered so-called quality investing. Since then, I haven't looked back, and from that point on, only the best was good enough.

Quality investing is a strategy focused on identifying companies with excellent quality characteristics based on a set of clearly defined criteria. While essentially every form of intelligent investing is value investing, if I had to label my approach, I would primarily consider myself a quality investor, but always mindful of price. I aim to prioritize the quality of a company first and then consider how much I am willing to pay for the shares.

I prefer to sell as little as possible. Once I have managed to pay a fair price for a wonderful company, I don't immediately exit when there is a slight overvaluation. My experience has taught me that you should not be too quick to sell excellent companies, even when the valuation slightly increases, to avoid unnecessarily disrupting the compounding effect. At the same time, you must remain vigilant and intervene when the valuation derails, which is something different than a slight overvaluation. It is a constant balancing act and, for me, has proven to be the most challenging aspect of the style so far.

I also have a great fascination for intrinsic valuation and, in particular, the thought process behind it. It’s an important part of my strategy. What drivers influence the well-known price-to-earnings ratio? Why do qualitative companies trade at much higher multiples than low-quality ones, without having to be more expensive? Why and how do factors like growth, ROIC (Return on Invested Capital), and risk impact justifiable price multiples? All of this can be explained through intrinsic valuation. You will learn that excellent companies showing robust growth and deliver high returns on their capital may trade at a premium compared to their weaker counterparts. You can quantify and demonstrate these arguments instead of simply stating, lacking any supporting evidence, that quality deserves a premium.

𝗛𝗼𝘄 𝗺𝗮𝗻𝘆 𝘀𝘁𝗼𝗰𝗸𝘀 𝗮𝗿𝗲 𝗰𝘂𝗿𝗿𝗲𝗻𝘁𝗹𝘆 𝗵𝗲𝗹𝗱 𝗶𝗻 𝘆𝗼𝘂𝗿 𝗽𝗼𝗿𝘁𝗳𝗼𝗹𝗶𝗼?
My personal stock portfolio currently consists of 18 stocks. I find my current portfolio manageable in terms of monitoring and follow-up. Research indicates that you can achieve about 93% of the benefits of diversification with a portfolio of approximately 20 stocks from different sectors. My portfolio comes close to this recommendation, although I do have two stocks from the same sector at times.

𝗪𝗵𝗶𝗰𝗵 𝘀𝗲𝗰𝘁𝗼𝗿𝘀 𝗱𝗼 𝘆𝗼𝘂 𝗺𝗮𝗶𝗻𝗹𝘆 𝗳𝗼𝗰𝘂𝘀 𝗼𝗻?
I do not focus on specific sectors. Instead, I concentrate on companies and look for certain characteristics. Consider factors such as growth potential, sustainable competitive advantages, pricing power, and ideally, the ability of the company to generate profits even during a recession.

I prefer to see evidence in the numbers of the past 5 to 10 years that the company has met these criteria in the past. I seek a track record of steady revenue growth and high returns on invested capital (preferably driven by high margins). Additionally, I ensure that my chosen companies generate cash while they grow and maintain good financial health. By focusing on a few simple criteria, I have saved myself many headaches as an investor.

If companies meet a significant portion of these criteria, I am indifferent to the sector in which they operate. However, the stringent criteria naturally exclude certain sectors. Characteristics that I seek, for example, are not typically found in banking, the airline industry, commodities, or the automotive sector. I don't need to waste time on those sectors since companies there, by definition, will not qualify.

𝗪𝗵𝗮𝘁 𝗮𝗿𝗲 𝘆𝗼𝘂𝗿 𝗵𝗶𝗴𝗵𝗲𝘀𝘁 𝗰𝗼𝗻𝘃𝗶𝗰𝘁𝗶𝗼𝗻 𝘀𝘁𝗼𝗰𝗸𝘀?
I am not a fan of top three lists; I prefer to focus on my entire portfolio. Sometimes, the stocks with the highest expectations lag behind, while those you believe have already had their significant surge after a good year continue to rise cheerfully.

Nevertheless, I will mention three because I know how much investors love lists:
1. I strongly believe in the French conglomerate $LVMUY - LVMH, a stock that immediately provides exposure to a large part of the broad luxury sector. This sector defines its own interpretation of the most attractive trait a company can possess: pricing power. Customers in this sector not only accept price increases but are delighted by them. A peculiar phenomenon, but as an investor, you won't hear me complaining.

2. Additionally, I have a soft spot for $V - Visa and $MA - Mastercard (I mention them in the same breath). These companies have rarely disappointed me, and I believe they can continue to excel in what they do best for years: dominate a secularly growing sector without the need for capital to fund their growth (which explains the relatively high multiples at which they trade).

3. Finally, I’d like to mention the (probably internationally unknown) beautiful Belgian business $MELE - Melexis. It is a well-managed company with pronounced quality characteristics and promising prospects that, in my opinion, is currently undervalued.

𝗪𝗵𝗶𝗰𝗵 𝘀𝘁𝗼𝗰𝗸 𝗵𝗮𝘀 𝘁𝗵𝗲 𝗵𝗶𝗴𝗵𝗲𝘀𝘁 𝗿𝗲𝘁𝘂𝗿𝗻?
$NVO - Novo Nordisk still holds the top spot. I purchased the stock in the summer of 2019, and the rest is history. Everything that could go well truly did, and currently I'm looking at a staggering 380% gain, equating to a CAGR of 42%.

Following Novo Nordisk are companies like $CPRT - Copart, $MSFT - Microsoft, $INTU - Intuit, $META - Meta, $GOOGL - Alphabet, $OR - L’Oréal, $MCO - Moody’s, and $SPGI - S&P Global. Those stocks have also been very good to me. I am active in both European and American stock markets, but the best returns still come from the latter.

𝗪𝗵𝗮𝘁 𝗶𝘀 𝘁𝗵𝗲 𝗯𝗶𝗴𝗴𝗲𝘀𝘁 𝗶𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁 𝗺𝗶𝘀𝘁𝗮𝗸𝗲 𝘆𝗼𝘂 𝗵𝗮𝘃𝗲 𝗺𝗮𝗱𝗲?
Do you have a moment? I've made quite a few in my career. The most memorable is undoubtedly my purchase of a handful of bank stocks in early 2008, right at the beginning of my stock market journey. We all know how that year wrapped up.

In recent years, I haven't had any major slip-ups, but let's not forget that these have been good years for investors, especially for quality investors. That's why it's a better idea to always evaluate the decision-making process rather than just the results. Undoubtedly, I made some purchases that yielded good results, despite a weak decision-making process.

However, there are also instances where I made suboptimal decisions and incurred losses. I assume that's what you're referring to with your question. The mistakes I made in recent years should primarily be attributed to valuation. I don't mean to imply that I bought stocks at excessively high prices – I try to avoid that. Rather, the issue lies in my reluctance to sell them when the valuation deviated from a reasonable course.

I once bought $EL - Estée Lauder at a fair price but failed to sell the stock when the valuation skyrocketed to a point where it was no longer justifiable. I thought it was better to simply hold onto such an excellent company, even when it was trading at 50 times earnings while growing at not even 10% per year. That was a mistake. At these valuations, the market shows no mercy when operational issues arise, as was the case with Estée Lauder. That became painfully clear to me.

𝗠𝘆 𝗳𝗮𝘃𝗼𝗿𝗶𝘁𝗲𝘀
𝗙𝗮𝘃𝗼𝗿𝗶𝘁𝗲 𝗯𝗼𝗼𝗸: Investing encompasses various domains, each with good books. Therefore, I'll mention a few:
- The works of Damodaran to refine your knowledge of valuation.
- "Richer, Wiser, Happier" by William Green to learn from the great minds of the world.
- "The Almanack of Naval Ravikant by Jorgenson on mindset.

𝗙𝗮𝘃𝗼𝗿𝗶𝘁𝗲 𝗽𝗼𝗱𝗰𝗮𝘀𝘁: I don't listen to podcasts; I exclusively read books.

𝗙𝗮𝘃𝗼𝗿𝗶𝘁𝗲 𝗾𝘂𝗼𝘁𝗲: "Don’t confuse brains with a bull market" - Humphrey B. Neill. I believe that quote carries an important message. Constantly reflect on yourself and do not become overconfident when the markets are in a celebratory mood. Sometimes, stocks rise simply because the market has gone crazy, not because one is a brilliant stock picker. Acknowledge that.

𝗙𝗮𝘃𝗼𝗿𝗶𝘁𝗲 𝗙𝗶𝗻𝗫 𝗮𝗰𝗰𝗼𝘂𝗻𝘁: An account that I can warmly recommend is @QCompounding. He shares a lot of interesting free content about investing in general and quality investing in particular. The person behind the account is a hard worker who invests a tremendous amount of time in what he does, and it shows in his content.

And also, check out @ValuingDutchman. When I hit a roadblock in fundamental analysis, I first try Google, then my bookshelf. If the issue persists, I shoot @ValuingDutchman an email. I know my problem will then be quickly resolved. I learned a lot from this guy, and still do. Nowadays, he is pretty active on social media, sharing his insights. Make good use of it.

𝗪𝗵𝗲𝗿𝗲 𝗰𝗮𝗻 𝘄𝗲 𝗳𝗶𝗻𝗱 𝗺𝗼𝗿𝗲 𝗶𝗻𝗳𝗼 𝗮𝗯𝗼𝘂𝘁 𝘆𝗼𝘂?
If you want to learn more about my interpretation of quality investing, take a look at the book "The Art of Quality Investing", which is set to be released soon and will be available for pre-order on Amazon later this week at a temporarily reduced price. It's an English-language and updated version of my first book, "De kaviaarformule", which was originally published in Dutch in 2022. Quality investing is the central theme of this book. Using a practical and easily applicable checklist, you can get started on your own immediately after reading. Stay updated on the book's developments through the Twitter channel @QCompounding.

While my blog http://beleggeninkwaliteit.com is currently in Dutch, there may be English-language blogs in the future. Quality investing, in-depth stock analyses, valuations, and occasionally a touch of behavioral finance. Feel free to subscribe; it's free.

Disclaimer:
The information and opinions provided in this article are for informational and educational purposes only and should not be considered as investment advice or a recommendation to buy, sell, or hold any financial product, security, or asset. The Future Investors does not provide personalized investment advice and is not a licensed financial advisor. Always do your own research before making any investment decisions and consult with a qualified financial professional before making any investment decisions. Please consult the general disclaimer for more details.