Travel Light to Journey Far

“Tous nos autres biens sont investis dans nos entreprises et nous voulons qu’ils y restent.”

 “All other assets are invested in our businesses and we want them to stay there.” [Translation from French]

The above quote is by Gérard Mulliez, the low-profile mercurial billionaire founder of the Auchan Group and “France’s Sam Walton” who said in a rare interview in 2007 that he is the proud owner of his eleven-year-old Mercedes, a house and a second home – and all other assets are invested in the business. His net worth is estimated by Forbes in 2016 to be at least S$35 billion.

Gerard Mulliez is also the cousin of billionaire Michel Leclercq who is the founder of the popular sporting goods retailer Decathlon; the Mulliez family owns 40% of Decathlon.

Success Of Auchan Group

The roots of Mulliez /Auchan’s success emanate from a tipping point event in 1977: Auchan introduced the first employee share ownership scheme in France at a time when it was quite revolutionary.

Employees can transfer part of profit-sharing bonuses to a company mutual fund Valauchan which is invested in Auchan shares. Employee share ownership is a tangible way of enabling each employee to create a personal holding by combining savings with company growth.

In time, it can help them to finance personal projects such as access to property, paying for their children’s education, or making provision for retirement.

On a daily basis, being an employee shareholder (as 97% of Auchan France’s 55,000 employees currently are) means developing a more responsible attitude to one’s work.

When everyone is mindful of the company’s performance, employee share ownership develops relationships of trust and co-responsibility, and reinforces the sense of pride in belonging to the company.

Its success has spurred the development of shareholding abroad since 1996. It is now implemented in 9 of the 12 countries where Auchan operates (Spain, Portugal, Hungary, Poland, Luxembourg, Italy, France, China and Russia), with a total of more than 160,000 shareholders. Over 163,000 employees in 9 countries owned 10.2% of the company’s stock.

An Entrepreneur’s Higher Purpose

In Asia and Singapore, the media and most people are enamoured with the wrong “entrepreneurs”. The difference between a businessman and an entrepreneur is that a businessman can always make money for himself but an entrepreneur builds an idea larger than himself to serve others and carry more people on board the bus.

Outstanding entrepreneurs want to build and scale their businesses so that they can give more. Only when we have the desire to give, then can we want to persevere in building something meaningful.

This urge to build in order to give is the magnetic north to scale a durable economic moat and they work obsessively to realize this vision.

With their simple and obsessive focus on their Work larger than themselves, Hidden Champions are akin to the ancient “javelin warriors” who knew they must travel light to journey far. As described by American author Steven Pressfield about the “javelin warriors”:

“All the weight is in their weapons. The crafting of each javelin can take months, with sacrifices offered to the shaft of ash or cornel while it still grows on the tree.

‘Truth’ is the missile weapon’s supreme virtue, meaning the absolute straightness of its line, for a warped javelin will not fly true. No measure is spared to protect its truth.

The javelineers sleep with their spikes, wrapping them in their cloaks while they themselves shiver, to keep the snow and wet from swelling the grain.

To behold the perfection of flight achieved by a master, his missile neither ‘pluming’ nor ‘tailing’, but ‘holding its head up’ as it tracks in to its target – this is a thing both beautiful and terrifying, and the man who can do it is accounted of supreme consequence.

Training with the javelin looks easy; it is impossible. The mere appearances of javelineers in the field has caused valiant foe to withdraw without a fight.”

Personally, I am reminded of a local entrepreneur whom we met a decade ago. The company looked to be a “value stock” with its “cheap” valuations and a niche business operating in a “rising tide”.

The flamboyant founder boasted to us then that he changed his sports/luxury car every few months and that he “can always make money”. Its market cap has since collapsed by more than 70% and continues to trade even further below its book value.

I am also reminded of a classic quote in a Bloomberg interview in July 2012 done on the Freitag brothers – Markus and Daniel – behind the highly successful eponymous-branded rugged but sexy bags and fashion accessories made from recycled old truck tarpaulins in their Zurich factory since 1993:

“Our company is our Rolls Royce. We reinvest everything because we want to grow by our own means.”

Emperical Research – “Off-The-Job” Behaviour 

Accounting researchers Abbie Smith, Robert Davidson and Aiyesha Dey published in the top-tier Journal of Financial Economics the intriguing empirical research paper “Executives’ ‘Off-the-Job’ Behavior, Corporate Culture, and Financial Reporting Risk”.

They examined U.S. firms from 1980 to 2010 how two aspects of CEO behaviour outside the workplace, as measured by prior legal infractions and the ownership of luxury goods, are related to the likelihood of misstated financial statements, including frauds and material reporting errors.

Frugality affects an executive’s stewardship of corporate resources and indicates an enduring corporate trait of consistent disciplined management of spending to achieve long-term strategic objectives.

Personally, I think that entrepreneurs without a long-term strategic mission and a larger-than-self purpose for their company & its stakeholders are more inclined to indulge in ostentatious lifestyle. They tend to tread the hedonistic treadmill that befit their personal status and to reward their personal hard work.

We believe it is not enough to invest in aligned owner-operators who are javelin warriors travelling light. We ourselves must “travel light”.

Value investors need to have the same heartbeat as the wide-moat compounding Hidden Champions: value investors cannot see Hidden Champions as some dragons to slay; we got to look at them with soft eyes until everything – us and them – becomes one.

Hidden Champions Investment Philosophy – Eating, Living & Breathing Hidden Champions

We strive towards congruence in thoughts, behaviour, action and life values with our investment philosophy and strategy, from having no personal trades in the investment universe of the stocks the portfolio invests in right down to our eating habits.

When I dine at the Nex Serangoon shopping mall, my choice is clear. I would head to a Japanese fast food cafe in grilled chicken called Torigo to order the S$5.50 tasty and less-oily Amai grilled chicken wings rice with French fries because it cooks the food using the Rational AG intelligent commercial kitchen ovens.

It stores its food in the industrial refrigerators produced by one of our Asian Hidden Champions portfolio stock to keep the raw food fresh. Besides commanding a domestic market share of 46% for industrial refrigerators, this Asian Hidden Champion is also partly behind the reason why some of your ice-blended drinks tastes so much smoother than others.

The ice flakes that are blended in most Starbucks and The Coffeebean & Tea Leaf outlets in the world are made by their automatic ice-making machines which contain highly intricate details in the cooling elements and unique freezing process, ensuring the ice flakes are consistently of the highest quality and crystal clear throughout the ice-body.

This Asian Hidden Champion has an overwhelming 66% domestic market share for ice-making machines (27% global market share), as well as 44% market share for dishwashers and 66% market share for draught beer dispensers.

To the end user customers, total cost equals purchase cost, operation cost and maintenance cost. This is why this “ice king” is clearly the leader in investment value. Its reliability and dependability are unparalleled in the industry. The commitment to quality continues after the sale with excellent after-sales service with speedy response and on-site technical assistance.

This Hidden Champion believes each employee is a part of the concept of shared responsibility for assuring customers the best possible quality. From the design engineers, manufacturing employees, marketing and sales people and all those involved throughout the organisation all the way to its distributors – working together is the key to success. This Asian Hidden Champion is up 10% from our investment cost.

Similarly, do you know that 70% of the tea filter bags in the world are made from the automatic packaging machines by one hidden champion called IMA SpA located in Bologna’s Emilia Romagna known as the “Packaging Valley”?

At the 14th Annual Value Investing Seminar held in Italy’s Trani organised by our friend Ciccio Azzollini, who is the CEO of Italy-based investment vehicle Cattolica Partecipazioni.

I attended the seminar with my good friend John Mihaljevic, the creative genius behind the Manual of Ideas. I asked the audience of fellow institutional investors the rhetorical question: Why is it that throughout the 2008/09 global financial crisis, Italy has remained Europe’s second-largest export economy, after Germany, despite Italy being ranked the 80th place in the World Bank’s “Ease of Doing Business” survey because of his strong labour unions, seemingly boundless bureaucracy, organised crime, and endemic tax evasion?

Share price of IMA Industria Macchine Automatiche SpA (IMA:MIL) vs S&P 500 Index

I shared how even in the most austere of environment, wide-moat Hidden Champions are able to compound value in uncertain times such as the low-profile IMA SpA controlled by the Vacchi family.

They are the dominant leader in tea filter bag packaging machines, including high-tech automatic machinery applications in packaging for soup cubes and dairy packaging machines (cheese, butter, margarine, yeast) with a 70% global market share, pharmaceutical (tablet, capsule filling, coating, freeze dry etc), cosmetics, coffee and foods.

IMA has filed over 1,200 patents worldwide and has launched many new machine models over the recent years. Over 400 of its 3,600 workforce are designers committed to product innovation.

Hidden Champion Entrepreneur – Kazuo Inamori

During our 8IH monthly townhall meeting, I noticed that Selina SU Fangqin, our business development manager in our group’s education team, was reading a book by Kazuo Inamori and she shared that she was reading the book to better communicate and interact with her customers who are SME business owners.

I shared with Selina that Inamori-san is one of the most inspiring entrepreneurs in Asia and we deeply admire and respect him. Kazuo Inamori is the founder of Kyocera Corp, the global leader in advanced ceramics and solar electric generating systems.

The inventions of Inamori, who was the first person in Japan to synthesize Forsterite (a kind of ceramic that played a pivotal role in electronic circuitry for TV sets), helped supported Japan’s global revolution in TV manufacturing in 1950s after WWII. Kyocera’s advanced ceramic materials also fostered the development of the semiconductor industry. It is their social mission that distances the global hidden champions from the rest in their staying power and endurance.

Born into poverty, Kazuo Inamori lost his family home at age 13 and almost died that same year after contracting tuberculosis (“TB”). A religious neighbour handed him Buddhist religious tracts, urging him to meditate on the meaning of life.

As he meditated, his TB subsided. His reprieve left Inamori with the idea that he should strive for the betterment of humanity. Carrying this value in his heart, Dr. Inamori built two world-class companies from scratch in the course of a generation – Kyocera (founded in 1959) and Japan’s second largest telecommunications firm KDDI Corp (established in 1984).

Through his commitment to society, Inamori-san created the Nobel-class Kyoto Prize which honours contributors in technology, science, arts and philosophy by his Inamori Foundation. He was also the president of Seiwajyuku, a business leadership association dedicated to nurturing business owners and entrepreneurs.

Inamori-san carries the voice of entrepreneurship on a global scale as the “Entrepreneur for the World”, an award he was presented with during the World Entrepreneurship Forum in 2009.

Ordained as a Buddhist monk at 65, Inamori-san shared his words of wisdom which we believe value investors would pay heed to observe whether the owner-operators they invest in possess this quality:

 “If your goal is to be a rich and beautiful celebrity, or if you are not willing to sacrifice yourself for the world and other people, do not try to be an entrepreneur.

Entrepreneurs have heavy responsibilities and must share the fruits of their labour with employees and shareholders.

We must always have criteria in our hearts that can help us answer the question, ‘What is the right thing to do as a human being?’ and guide us to do what is good for society and humanity in our daily work.”