Interview met DoradcaTV

Beste lezer,

Ter gelegenheid van de publicatie van de Poolse editie van De kaviaarformule, die later deze maand verschijnt, werd ik uitgebreid geïnterviewd door Tomasz Jaroszek van DoradcaTV. Dankzij de huidige technologie kon het interview als podcast in het Pools worden uitgebracht.

Bijgaand vind je de Engelse geschreven versie van het interview. We hadden het onder meer over beleggingsstijlen, de huidige volatiliteit, home bias, kwaliteitsbeleggen, intrinsieke waardering, boeken en beleggingshelden. Het interview vond overigens plaats tijdens de Trumptarievendip, die inmiddels min of meer is hersteld.

What kind of investor is Luc Kroeze? Tell us your story.

I’ve been active in the stock market since 2008—specifically since early 2008, when everything still seemed calm in the financial world. In hindsight, it was probably the worst possible moment to begin, just months before the global markets crashed in September. But going through a financial crisis of that scale turned out to be an invaluable experience. It shaped the way I think and act as an investor—I don’t get shaken easily anymore.

Since 2014, I’ve been a full-time investor in real estate and stocks, and in recent years I’ve also been able to call myself a writer. After years of experimenting with different styles, I discovered so-called ‘quality investing’ around 2017. Since then, I haven’t looked back, and from that point on, only the best has been good enough for me on the stock market.

The investment world often revolves around two dominant styles: “growth” and “value”. What inspired you to define your own category — “quality” — and how would you describe it?

In short, quality investing is an investment strategy focused on identifying companies with outstanding quality characteristics, based on a clearly defined set of criteria.

I define quality as the degree to which something is good or meets certain standards. That may sound vague or subjective—and it's true that some investors argue that "quality" in the stock market is hard to pin down. Still, I believe that, broadly speaking, we can agree on what defines a high-quality company. In fact, a significant part of it is measurable through objective, quantitative criteria—something I explore in detail in the book.

With a simple tool like Finchat.io, you can perform an initial screening based on the numerical indicators discussed in The Art of Quality Investing, helping you identify companies worth investigating further.

But numbers only tell part of the story. They’re retrospective and provide a foundation—but to truly assess a company as high quality, you need more. You also have to look ahead. That’s why I incorporate additional, interpretive criteria, such as a company’s growth potential, the quality of its management, and above all, the presence of durable competitive advantages.

However, in isolation, there’s really no such thing as growth investing, value investing, or quality investing. As Munger rightly said: all intelligent investing is value investing. Growth, after all, is a crucial component in the calculation of value. You might buy a fast-growing company at 25 times earnings and be labeled a growth investor. But if that stock is actually worth 40 times earnings, your move could just as well be considered a sharp value investment.

The differences between these labels lie in the nuances of how and where we seek value.

The distinction between a value investor and a quality investor largely comes down to focus. Value investors typically start with price—looking first at how cheap a stock is before deciding whether the underlying business is even worth owning. Quality investors do the opposite: they begin by evaluating the intrinsic qualities of the business and only then decide what they’re willing to pay for its shares. The difference lies in where the emphasis is placed.

The contrast with growth investing is somewhat different. Many growth companies still have everything to prove and are often not yet profitable. Growth investors focus on the potential winners of tomorrow. Quality investors also seek growth, but they demand strong profitability and a pristine financial position at the same time. Put simply, quality investors aren’t looking for the winners of tomorrow—they’re looking for companies that have already won.

In the end, no matter what style they follow, all investors are essentially looking for something that’s worth more than the price suggests—the only difference is the path they take to find it.

Have you ever been tempted to follow a passive, index-tracking strategy?

Absolutely. In fact, alongside quality stocks, my portfolio also includes simple index trackers and real estate. The concentrated quality portfolio is where I can fully indulge my passion for stock picking—that's what I enjoy most. At the same time, my overall portfolio remains well-diversified, with broad exposure acting as a buffer against the inevitable mistakes I’m going to make along the way.

What inspired you to write a book?

I've been blogging about quality investing since around 2019 or 2020, back when it was less popular than it is today. I noticed there was a lot of interest in the strategy—which makes sense, given its simplicity and logical foundation.

I discovered that I really enjoy writing, and at some point I thought: why not write a book? It seemed like a fun challenge. The original plan was to print a limited number of copies to share with friends from my investing circle, but things turned out a bit differently.

The writing process pushes me to dig a little deeper and to keep learning constantly. It motivates me to take that extra step. Since then, I’ve written a second book about my perspective on behavioral finance, and I’m currently working on a new one—a practical, accessible guide to intrinsic valuation.

Did you have an “ideal reader” in mind when writing? Who is quality investing for?

This book is for the patient, long-term investor who seeks to reap the rewards of compounded returns over the years—without unnecessary headaches along the way.

I also believe the style is very accessible for motivated individual investors who are ready to take the next step in their development. The strategy itself isn’t complex, and at its core, quality investing is logical and straightforward. But at the same time, you need to be willing to go the extra mile to truly master the approach. It’s easy to learn, but hard to master.

The research process that comes with quality investing is deep, intensive, and time-consuming—but ultimately, it’s a rewarding journey.

Did you also have a “home bias” at the beginning of your investing journey? I must admit – the fact that you're a European investor and author, not an American one, is a huge asset of this book for me.

When I first started investing years ago, like most beginners, I didn’t look much further than my home country. But that didn’t last long. I quickly realized that the world offers far too many great companies to limit yourself to just the few close to home.

That said, I do invest exclusively in European and U.S. markets—I avoid more exotic markets due to concerns around weaker corporate governance or accounting standards.

Beyond that, I screen purely based on fundamentals, and I couldn’t care less whether a company is listed in Europe or the U.S. Quality knows no borders.

I live in Belgium, and by my definition of excellence, truly outstanding companies are rare here. I own just one Belgian stock, based purely on its fundamentals, valuation and outlook. I have absolutely no issue being fully invested outside of Belgium.

What’s your opinion: do American investors have an easier time given the market they start on, or does it no longer matter in today’s era of global trade?

It shouldn't matter. The stock market is just as accessible to us as it is to the Americans themselves. Again, let yourself be guided by fundamentals.

And don’t be misled by the seemingly higher valuations of U.S. markets. I'm not saying that the U.S. market isn't more expensive than many other markets, but rather that it deserves to trade at a premium, given the higher ROIC of its companies and the focus on intangible investments.

Companies that generate higher returns on their investments can trade at higher multiples without being more expensive overall. After all, they will generate more free distributable cash at the same growth rates. And it’s that free cash flow that drives value, not the profits.

Additionally, the way investments are made and reported plays an important role. Take Big Tech investments, for example. Many of these investments, in R&D, are currently booked as expenses on the income statement, while they should actually be treated as capital expenditures. This leads to the already impressive profit margins of these companies being even higher in reality. Big Tech is, in fact, much more profitable than we might assume based on current figures. This implies that the 'true' underlying P/E ratios of these companies are lower than the official figures suggest. The official P/E ratios are misleading since the profits of tech companies are artificially depressed compared to traditional companies, which capitalize their investments on the balance sheet and then depreciate them.

This also explains why the earnings of U.S. companies seem to be increasingly disconnected from stock prices. Terms like earnings, assets, and costs remain formally the same as they were 50 years ago, but their relevance to investors has visibly decreased. This is because investments in intangible assets like R&D and marketing have grown significantly in recent decades, compared to investments in tangible fixed assets such as buildings and equipment.

If you account for these adjustments in accounting, many of these companies are trading at higher P/E ratios, but they don't necessarily have to be more expensive overall. This is something that can be assessed on a company-by-company basis.

How long did it take you to develop the checklist method described in the book? Were there more or fewer criteria at first?

I think it took about a year or two, during which I added and removed criteria, before I arrived at the final checklist. The checklist emerged from the many books I read, fund managers I studied, and research I conducted. The development of the final checklist was a very organic process.

At first, I had a few more criteria, but over time I realized that the checklist that eventually made it into the book is comprehensive enough to select quality stocks. Adding more criteria doesn't contribute much and could lead to information bias. On the other hand, too few criteria risk overlooking important factors. As Einstein said, "Make things as simple as possible, but no simpler."

Do you consider some factors mentioned in the book more important than others, or would you give them equal weight?

Yes, if you can truly tick off all the criteria, you'll have found an incredibly high-quality company. But these companies are rare and seldom on sale.

However, it is currently possible, for the first time in a long while, to pick up top-quality companies at attractive prices. This is why market-wide corrections are appealing, as often everything gets dragged down with them. If you see the opportunity to buy such companies at an attractive price, I wouldn’t hesitate. After that, you don’t need to do much more than let time, the best friend of a good company, work for you.

That said, I am sometimes flexible with my criteria, and the value investor in me comes out, with mixed results. If the price is attractive enough, I can be a bit less strict on certain criteria. But there are a few I won’t let go of, such as sustainable competitive advantages, a healthy balance sheet, and a high return on capital. These are essential for me to execute the strategy as I interpret it successfully. I do notice, however, that my best results often come when I can tick off more criteria—especially in the long run.

Does your investor checklist and strict criteria help you during times like these? A trade war, high market volatility – it’s easy to get caught up in emotions.

The checklist absolutely helps during turbulent market times! That’s one of the great extra benefits of quality investing. In the current volatile market climate, you sleep a lot better knowing that your portfolio is filled with companies that can take a hit. They have massive margins, so the company won’t become unprofitable at the slightest setback. They carry little debt, are well-managed, and hold dominant positions within their markets. Let the markets storm all they want; the quality investor stays calm and doesn’t get rattled. If the companies we target face operational difficulties, i mean real difficulties, we’ll likely have other worries besides our investments. At that point, you're better off investing in some productive chickens, a vegetable garden, and a double-barrel shotgun.

In practice, does your method of finding quality companies result in a strong dominance of American markets, or do you also have companies from other countries in your portfolio?

Indeed, many paths on the stock market for quality investors don’t lead to Rome, as the saying goes, but mostly to the U.S. However, I do have some top-quality European companies in my portfolio. I own stocks in Denmark, Sweden, France, the Netherlands, Belgium, Germany, and so on. America has a lot to offer for the quality investor, but if you search carefully, during a quality screening, something good will always surface on every exchange that is worth further investigation.

Can you give an example of one or two companies that meet the criteria described in your book and explain why they qualify as quality investments?

Visa and Mastercard are great examples. The business model is fundamentally easy to understand, the company operates globally, and it can ride the secular growth trend from cash payments to digital payments. Not long ago, half of all payments worldwide were still made in cash. Sooner or later, that will change. Both companies enjoy some extremely strong sustainable competitive advantages, such as network effects, economies of scale, and unique technology, which gives them significant pricing power. They hold leading market positions and are well-managed.

While they may have a cyclical aspect due to exposure to consumer and travel-related spending, I believe the secular growth trends will provide enough counterbalance during an economic downturn. The potential for disruption can never be fully ruled out, especially in the digital payments sector, but for now, I think Visa and Mastercard’s positions are strong enough to weather any disruptions. Financially, both companies also look impressive. Strong organic revenue and profit growth, towering margins, and high ROIC. Their scalable growth requires minimal investment, making them cash flow machines with strong balance sheets.

With Zoetis, you can also check off the criteria. Zoetis is an American pharmaceutical company focused on animal health. It’s exactly the type of company I look for as a quality investor. Zoetis is easy to understand and operates globally in a structurally growing sector with attractive characteristics, such as cash-paying customers and limited competition from generic products. Furthermore, within this industry, the company possesses sustainable competitive advantages. Zoetis has pricing power and the ability to withstand economic downturns. People won’t cut back on the well-being of their pets, after all. In terms of disruption, given its broad product range, which isn’t vulnerable to technological innovation, I don’t see any immediate cause for concern.

The financials further underline this strong position: the company demonstrates a consistent growth path in both revenue and profit, with high and rising margins, and generates boatloads of cash. The company is also in good financial health.

I believe I’ve addressed all the criteria in my explanation. It's a great company, indeed, but still quite pricey.

Where is the limit of conscious portfolio management? How many companies do you consider the maximum that an individual investor can realistically oversee?

Great question. Although I write a lot, I do have quite a bit of time to monitor my stocks. But I’ve noticed that even then, a portfolio of twenty stocks can sometimes be challenging to track properly.

Ideally, you’d track about ten stocks, but that would expose you to unnecessary company-specific risk, which you can easily mitigate with a broadly diversified portfolio of around twenty stocks from various sectors. I’d rather have the extra diversification than the illusion of more knowledge than others by focusing on just ten stocks.

Another option is to allocate part of your portfolio to an index fund and then choose a concentrated quality portfolio. This way, you can still maintain sufficient diversification in your portfolio.

In your book, you mention the duo of Buffett and Munger, but also a few other important Wall Street names. In your opinion, who else is worth learning from? Whose knowledge do you draw on?

I think there is something to be learned from many investors. My advice would be to read as much as you can—there’s always a new investor to discover who has something interesting to say.

On the other hand, in my humble opinion, you don’t need much more to successfully invest in quality stocks than my three heroes: Warren Buffett, Terry Smith, and Aswath Damodaran. Also, read some behavioral finance literature, because at the end of the day, the biggest enemy in the stock market is likely to be yourself. Besides the analytical side of investing, it’s also useful—and even necessary—to delve into the psychological aspects of investing. Add to that the chapters in Howard Marks’ book The Most Important Thing about risk, and you are good to go.

You know, successful quality investing ultimately boils down to the three simple pillars of Terry Smith, to which you’ll need to apply your own interpretation. He says: Buy good companies. Don’t pay too much. Do nothing.

For the first pillar, buy good companies, I’d refer you to my book. The checklist will guide you to the right companies you are looking for.

For the second pillar, don’t pay too much, I recommend purchasing a textbook by Aswath Damodaran. Feel free to work with multiples, but in order to do that, you need to understand the process of intrinsic valuation. Michael Mauboussin once beautifully and completely correctly said: you have to earn the right to use multiples. Damodaran will help you earn that right.

Then, the third pillar remains: do nothing. This is often overlooked because it seems like the simplest pillar. However, this is precisely where many investors go wrong. This is where the psychological aspect of investing comes into play. That’s why I suggest reading a few good books on behavioral finance and not letting your own emotions and cognitive errors mislead you. Learn to do nothing!

That’s all you need to know to successfully engage in quality investing. Then, it’s just a matter of practice: analyzing and valuing companies fundamentally, and constantly repeating that process. You’ll get better at it, connect the dots faster, and need less time to get to the core of the matter.

What’s your favorite investment book — and why that particular title?

I have several favourite books. And your favorite books can change over time as you develop as an investor.

To follow up on your earlier question and my response, I will give my favorites in three areas: Quality Investing, Valuation, and Behavioral Finance.

In the Quality Investing category, the book Quality Investing by Lawrence Cunningham has been defining for me and will likely always remain in my top three. Today, I rank it number one in that category. In the Valuation category, I would choose one of Aswath Damodaran’s textbooks. The Dark Side of Valuation is, for example, a masterpiece and not just focused on young growth companies as the cover might suggest. Additionally, in the Behavioral Finance category, I would pick The Behavioral Investor by Daniel Crosby. I find this one more accessible and less dry than the groundbreaking work of Kahneman, and it is particularly suited for investors.

Now, a year after the book's release, is there anything you’d like to add or say to your readers.

I've had several book publications over the years, and usually, during the publication periods, the stock markets were at record highs, with rising valuations, especially for quality companies. The valuations often weren't attractive for buying stocks. This time, however, I can finally say: enjoy the sale.

There is always something that worries investors. But those who dare to look beyond today’s problems, such as trade tariffs, political tensions, or economic uncertainty, will discover that volatile markets often offer opportunities. Stocks of excellent companies are now being traded at prices that were 20% or more higher not long ago. In other words, what was much more expensive during sunny market days is now suddenly available at an attractive discount. The stock market is the only place where many investors don’t always get excited about lower prices. That’s not rational. If the stocks of excellent companies are temporarily cheaper without any fundamental changes justifying that lower price, you buy more, not less.