Cash flow kings – Investing in outstanding business models

The media often highlights quick profits from short-term trading. However, those aiming for sustainable investment success should focus on companies with robust business models, allowing them to benefit from the growth and strength of these firms over the long term.

Patience as an investment strategy
Patience is one of the most important virtues in investing. It matters in two key ways: first, being patient enough to wait for good buying opportunities and second, not selling the shares of successful companies too early, thus allowing the power of compound interest to work in your favour.

For example, an investor who bought Microsoft shares ten years ago at $42 and sold them three years later for a 100 percent profit would likely have been pleased. However, since then, Microsoft has not only increased its cash flow per share from $4 to over $15 but also its share price to over $420. This highlights how patience pays off in the long run.

The power of compound interest benefits not only investors but also companies themselves. Instead of distributing their cash flow, companies can reinvest it to achieve above-average growth rates over time. Three particularly successful business models have emerged in this context: companies that leverage economies of scale, "programmatic acquirers," and "capital allocators."

Economies of scale: bigger is better
Companies that achieve cost advantages through their size and pass these savings on to customers create a competitive edge that is difficult to replicate. This often leads to a positive feedback loop: more customers result in lower costs, which, in turn, attracts even more customers.

Economies of scale are particularly striking in the software industry, where marginal costs are almost zero. Once developed, software can be sold an unlimited number of times without incurring additional costs. Companies like Microsoft and Adobe generate massive cash flows as a result.

Programmatic acquirers: growth through acquisitions
These companies focus on acquiring small and medium-sized businesses that generate strong cash flows in niche markets. A common target is family-owned businesses, which often face succession challenges. The acquired companies are typically not fully integrated but retain their autonomy. The cash flow they generate is reinvested into further acquisitions, leading to greater risk diversification.

A prime example is Assa Abloy, a global leader in locking systems, which has acquired over 300 companies since 1994. This approach has driven not only growth but also a significant increase in its share price.

Capital collectors: working with other people's money
This group primarily includes insurance companies and banks. These businesses collect capital through deposits or premiums and invest it in financial markets or equity stakes. Insurers, in particular, can achieve strong returns due to their ability to manage risks efficiently.
A notable example is Kinsale Capital Group, a US insurance company specialising in niche markets such as providing coverage for cannabis businesses. Kinsale reinvests its cash flows instead of distributing them as dividends, enabling long-term growth.

Conclusion:
Investing in companies with strong business models and solid cash flows offers exceptional long-term return opportunities. Business models that leverage economies of scale, pursue strategic acquisitions, or effectively manage capital have proven to be highly resilient and profitable. However, alongside selecting the right companies, the purchase price is equally crucial. As Warren Buffett famously said: "A great company is not always a great investment – the price must be right."

More information on the<br>FIDUKA-UNIVERSAL-FONDS I

Share class R: ISIN DE0008483736

Share class I1: ISIN DE000A3E17Z7