 Good day, fellow investors. I'm here with head investment manager of NicheMaster funds, Peter Barklin, and as would Warren Buffett say, don't worry about the stock market crashing, just buy great businesses. As a former consultant for more than 30 years advising the biggest businesses in the world, Peter Barklin and his partner, Perry Enster, have their money in their own fund, where they focus on buying great, amazing businesses. However, we hear that word, buy great businesses and then you don't care about what happens in the market, then your focus lies on that and you don't have to worry about anything. But the question is, of course, what the hell are great businesses? How do we find them? How do we select them? And how do we buy them and then have sleep well at night, let's say, with our investments? I'm so happy today that Peter has agreed to explain how he does it, how he finds great businesses and how he uses his 40 years of consulting background to find those great businesses. And I have seen stocks in his portfolio that went up five times over the last few years because those are great businesses and they just keep doing what they do, no matter what happens in the market, in the economy, no matter what happened in the last ten years, which is actually a great business. So please tell us about how the hell did you find those stocks that went up five times because they are great businesses? Well, so when you start by saying we are value investors, we consider ourselves to be value investors, but people define that differently and some would define that as simply buying the cheapest companies you can find and that's a statistical case for that. It's not our style though because, you know, when you get burned from the problem with very cheap companies is that a lot of them don't deserve to be any more expensive. As somebody once said, a bargain that remains a bargain is not a bargain. So what our style has become, I think I can say, is we like to buy companies of very high quality and they are more expensive than, you know, just the cheap companies, but we distinguish very clearly between price and value and so if we can buy a really valuable company periodically when opportunities occur for a price that is lower than that value, then we tend to pile into those companies and that allows us to not only make the profit from the investing, but also to sleep at night because we know that these companies are very, very sure that these companies will sustain anything the markets throw at them. How do you know what is the value and when the price is below that value? So first, I mean, first, I think maybe I should just first say, so what is, how do you find these great companies? And most of them are easy. If you want to have, it's very easy. They're very famous. Coca-Cola is a great company. Procter & Gamble is a great company. Unilever is a great company. But here's the problem. They are all well known and very large companies. So those companies are likely to be called what we, to be what we call fully priced. So the price already is at the level of the value. So what we try to do is to look for companies that are not famous yet, but are already great companies, but are much, much smaller. And the way we find them is little by little, we trawl to information. We read the press, we search databases and so on. And we have a list of criteria for what we define a great company to be. The first thing, which it may be obvious, but people tend to overlook it in my opinion, is there has to be a long track record. You know, we don't buy anything on hopes and dreams. We buy things. For example, management can show that they have increased dividends every year for 15 years in a row. So we look for that long track record, solidity of management. A company where management has been there for a long time and is likely to stay for a long time and some managers will make some crazy decisions and diversify or start some business that they have no business starting in our opinion. Great management won't do that because they understand where the value of the company comes from. And we will look at a number of financial things. For example, in another video we mentioned the concept of competitive advancements. So it follows that if a company really has a competitive advancements, then it must make a high level of return on capital. Otherwise it's just talk. But then the logic also reverses. So when you find a company that consistently, not for one or two years, but consistently makes a high return on capital, then that company must have strong competitive advancements. Now we just have to go and look for it and find what it is. So we simply start by looking for companies that are very profitable in terms of return on capital, return on equity and so on and so forth. And then we use that to draw back to see where does that profit come from. So a high return on capital, a huge effect and advantage of high returns on capital is that companies that have these high returns can grow and finance their own growth without having to invest too much money by definition because they use less capital. So that means they can grow and still pay dividends to us while they become bigger and more valuable. An example of such a company? We were talking about one yesterday. Decrypharmaceuticals have increased their dividends every six months for the last 15 years at least, maybe even longer. And they're not at the expense of their debt going up, but simply as a result of them creating, generating more cash flow every year, more and more cash flow. They spend some of that cash reinvesting into the business and some of that cash flow could be, in their case they haven't done it, but it could be used to buy back shares. And the rest is used to pay to investors as dividends. So this Decrypharmaceuticals that you spoke yesterday on the conference, so you say this is the 15-year track record of improving dividends and you have seen a chart maybe I can show that chart to investors. Then you say the management is focused on returning money wealth to shareholders with that dividend and the management is not doing stupid things. And if I remember now from the conference you said that they did something in 2013. Can you explain how they focus on their business and what they're good in? Which other management wouldn't do? That was amazing. Okay, so back in 2012 this company had two major business divisions. One were veterinarian surgeries around the United Kingdom. Another one was patent protected medicines for pets and other animals. And those two businesses were hugely different in terms of their profitability and cash flow profiles and so on. The patent protected part which was half the business was vastly more profitable than the surgery business. Then one day they got approached by somebody who wanted to buy the vet surgeries. And of course the negative effect of that, the positive effect is suddenly you have a lot of money in your pocket. But the negative effect for many managers is that who would sell half the business we run? Because it's almost like telling people that we have given up. Not according to me but according to a lot of managers they would say that. But a truly great manager such as the people who run Degra said, you know what? What we do is we sell half the business. We use the proceeds from those sales, hundreds of millions of pounds to buy companies and to invest in further research and development to strengthen our patent protected part of the business. And then we see that growth come back and this time in a much more profitable company. And that's what they have done. And they are now back almost back to the level of sales in 2012. But with much higher returns, profit is maybe at least twice what it was in 2012. So that would be an example of great management. That's what I call great management. And you're still invested in that company? We're still invested. In fact it's a company that has already been affected by Brexit. Not Brexit itself, fundamentally in the company, but the market theaters around it. So we have actually just a few weeks ago increased our investment in the company. How much did the company fall because of Brexit? Because of these theaters. Maybe about 30%. And that's the fascinating thing, the difference between bad companies and good companies, or high quality companies, as I call them the good ones, is that they also fluctuate on the market. So the market seems to have... And the fluctuations means that it provides opportunities for investors, of course, to get in when they're not expensive. So it's not only... That's the fascinating part. It's not only the low quality companies that see their prices fluctuate. It's also the high quality ones. The difference is the high quality ones always come back. The low quality ones sometimes go to zero. And that's what we don't want, because that's what would keep us up at night. That would be permanent capital loss and that doesn't fit Buffett's rule, don't lose money, and it's his second rule, don't lose money. So how would you summarize now what would be the three or five points that we have to focus on when looking at great business and when wanting to find great businesses to invest in? Okay, so starting with the financial measures, return on capital, abilities to generate cash flow, ability to consistently increase dividends, are three key things that are very quantifiable. So an easy to scan, you go into any stock screener and they can find stocks that have those characteristics. But then we dig deeper. We look at, as you spoke about, the quality of management. You have to find out what are their track record, are they brand new in this business, is this really what they stand for? And the consistency of having done this over a very long time, and that is so important. You don't see in any, even if you go to Bloomberg, you see maybe three or maybe five years of financial numbers, I want to see a lot longer and very consistent. So you have to do some footwork. You have to read some annual reports. And what else? Then this understanding about where the competitive advantage comes from that we have talked about before, because without that we don't really know what the threats to the companies are. Because all companies, I mean all high quality companies are envied by competitors or potential competitors. So there's always some, Steve Jobs used to say, his nightmare was that every morning thousands of engineers go to work around the world wondering how to outdo him. And so imagine that must have created some nightmares. So I want to know also what is it that our companies need to be able to protect. So then I can look and scan the horizon for threats to those. So we try to understand that as well as possible. Is it patent protection? Because patents have only a relatively short lifespan. Or is it something else? Is it the scale of the business? Is it the quality of the branding? So there's at least five, six things before you can truly use the term high quality company. But just start by, I would advise you, start by looking at some that are famously high quality but are already too expensive. Just ask yourself, what are the qualities of Coca-Cola? Asking about Coca-Cola. What do you mean when you say that it's too expensive? What are you looking? What parameters are you looking there? So, I mean, we always do the easy price earnings, price book and so on and so forth and see how much the inverse of the price earning is the earning field. So if you have a price earning of 25 as you probably do in Coca-Cola's case the inverse of that is 4% return to me but then of course Coca-Cola's earnings grow but 4%, if I buy them at the current price I only get 4% return and then I wait for it to grow and I think I can find some that are high quality but where I can get 8% or maybe even more than 10%. So that's one way of looking at it. When we get to make a real investment then we always do a cash flow, discounted cash flow valuation which is fraught with problems of course. As that other investor you mentioned before used to say this discounted cash flow value is a number that is impossible to calculate but essential to estimate and I think that makes a lot of sense because once you go through the calculation it's not complicated to go through but you realize that you change your assumptions just a little bit and the number becomes completely different and so it really forces you to think about the assumptions and the assumptions are about the business so that means you have to go back and say what would a price drop of 5% mean or what would that be? And if we go back to the previous video we made you can find those higher earnings yields within small companies because big great businesses have already, let's say lower earnings year yield because everybody knows them and everybody wants them in their portfolio. Thank you, I think this was really amazing and it will really help investors to focus on and I think the hard part is you look at 100 businesses but probably 99 you have to just know it doesn't fit the criteria and you say next which is I think the hard part when it comes to investing. Yes, but it's actually it makes life easier because I know for example first of all I don't have to troll to a lot of different companies and looking for bargains because companies that are not highly profitable I don't even need to look at them. Secondly, so what I do do is we have a list of I don't even know how many companies are on it of companies that fit the criteria based on the value they create but don't fit it based on the price we pay the price is too high so I keep following those and I know I would love to own these if one day they come up for sale which they sometimes do and then we can add them to the fund so that makes life a little easier. The other thing about making life easier is that there are whole industries that don't create value and the most famous one is airlines airlines just do not create shareholder value they create lots of value for passengers but not for shareholders. So that means I don't need to follow a single airline so that already cuts out a lot. Not even the discount, Ryanair and so on. No, no, because even that last time I looked, because I do look there were 730 airlines registered in the world and three of them had any real profitability and if I need to look to 730 companies to find three markets my time is better spent elsewhere, you know. Very interesting. So Ryanair is a great company South West Airlines in the US is a great company but I would not propose to have been able to identify those. I'll tell you one thing though there's a company in the indirect airline business which is called Amadeus which handles most ticketing systems around the world and they get all the value of the... I mean this is a highly profitable company it's a Spanish company quoted in Madrid AMS, Madrid which has been an excellent investment it's too big so it's not in our fund but that's the way a place to look. So that would fit the great business. That would fit the... that is certainly a great business and an excellent high quality business. So that one is on your list or not? It's not on the list because it's too big. So it's... and I don't wish for it to get smaller so that's probably a ship that has sailed as far as we can tell. But if, I don't know, Spain goes bankrupt or Italy or something we might see the ETF sell it and then buy a great business at the lower price. Yes, but it's already... I mean it's big, it's already well known but it's just an example of a company that is living on the fringes and then becomes interested. Well, thank you for discussing this I think you mentioned some things that are very very interesting like return on invested capital or return on capital return on equity cash flows so we can make a video on that if you agree. Sure. Perfect, well thank you. Thank you for watching and we'll see you in the next video.