On The Hunt for Great Companies
Have you ever heard about Simon Kold?
He’s a great friend and investor who wrote ‘On the Hunt for Great Companies’.
Let’s dive into his investment philosophy and the key learnings from his book.
Bio Simon Kold:
- Age: 37
- Lives in: Copenhagen with his wife and two children
- Job: Founder of Kold Investments (investment firm)
- Invests since: his mid 20s
What’s the essence of your excellent book On The Hunt For Great Companies?
Simon Kold: It aims to be an easy-to-read, fun, and practical textbook for evaluating a business's long-term quality across 17 different aspects. It is designed for both public and private market investors and business operators.
The book serves as a practical toolkit for investment analysis, offering step-by-step methods for empirically assessing business quality in the real world. It’s not exclusively for “quality investors”—it’s for any investor who wants to evaluate quality based on real-world evidence rather than wishful thinking.
It’s important for me to distinguish between my personal investment philosophy and my book On the Hunt for Great Companies. The book is not an attempt to describe my personal investment philosophy.
Given the title of your book, I presume you view yourself as a quality investor?
Simon Kold: I do not view myself as a ‘quality investor’. What I mean is that I do not have a fundamental belief that holding high-quality companies will necessarily generate higher returns than holding low-quality companies. That said, I believe higher quality justifies a higher value. Quality is an input to value. It’s critical to assess current and future quality, and the more there is, the better—because that means higher value. But to me, quality is not a filter criterion in itself; it is an input to value.
In my current portfolio, I hold a few companies that defensible quality investors would probably consider very high quality—perhaps apart from being cyclical. Most of my companies, however, are probably better described as ‘emerging quality’. I wrote a bit about emerging quality in the final chapter of my book. These companies don’t necessarily have a high return on invested capital yet, but they often have a decent incremental ROIC. They are still in the process of expanding their competitive advantages or exercising reinvestment options that distort their consolidated economics. Their products may not be entirely complete yet. While these companies are far beyond finding product-market fit and achieving positive unit economics, their products are still evolving. The adoption curve of their technology isn’t a fully developed 100-year S-curve, as in the case of elevators—something I would consider ‘developed quality’. Instead, these are often cases with, say, a 30-year adoption curve. We’re well past the point of betting on the product itself. We might be a third or halfway into that adoption curve, making it more of a bet on emerging quality developing into fully developed quality, rather than a venture-style bet on the product or technology.
How would you then describe yourself as an investor?
Simon Kold: My strategy is focused on companies with scale benefits on either the demand or supply side. These are network effect leaders or scale-economies-shared cases. And they always have passionate management (you can read more about my definition of passion in Chapter 1 of my book).
I should also add that my approach to fundamental value is not so much focused on the present. For example, I rarely calculate an estimate of fair value in the present. Instead, I think in terms of a spectrum of future Destinations or outcomes, typically 6–8 years out.
How would you describe your investment philosophy?
Simon Kold: I look for cases where I believe there is a low risk of losing my money, a centered probability mass around what most people would consider a reasonably good outcome and a decent shot at a true multi-bagger.
I once learned about the concepts of state preferences and Arrow-Debreu prices, which highlight how individual preferences shape value. The value of an asset, game, or situation isn’t objective—it’s subjective, depending on the person evaluating it. To determine value, you consider possible future scenarios, assign probabilities to each, and factor in your personal preferences for each outcome.
Take an extreme example: Russian Roulette. In this game, there’s a 5/6 chance of winning $10,000 but a 1/6 chance of dying. For most, the possibility of death makes the game feel infinitely negative—they would pay any price to avoid it. However, someone in a desperate situation might see the potential reward as worth the risk and value the game positively. The same applies in less extreme scenarios. Consider buying insurance. One person might value peace of mind and gladly pay for coverage, while another might prioritize saving money and choose to take the risk. Individual preferences create vastly different valuations of the same opportunity.
I determine the value of something—or at least whether it is attractive—based on my view of the potential future scenarios at The Destination, the probability of each scenario, and my own subjective preferences for each potential future state of nature. What are my subjective preferences? They are a combination of loss aversion and optionality:
I cannot tolerate much subjective probability that the intrinsic value at The Destination could fall below what I pay today.
I want most of the probability mass centered around at least a 2–3x kind of outcome.
It’s important to me that I feel I have a reasonable chance at a true 4–6x multibagger over the 6–8-year horizon I typically consider.
Now, I have a near-zero preference regarding what I think could happen to the share price in the next 12 months.
I am simply indifferent; it’s not a factor in how I determine the attractiveness of the opportunity. Other investors are far from indifferent about the potential states of nature over such a timeframe. This means that two investors—me and someone else—who both agree 100% on the scenarios and the probabilities of each scenario at The Destination can still arrive at contrasting views of what an asset should be worth today or whether it is attractive to own. This divergence arises solely because of our contrasting individual preferences.
You describe your preference for long-term optionality. How do you try to find that?
Simon Kold: I do have one axiom —like a theory I can’t prove but believe in and build on—which is that exceptionally passionate people increase long-term optionality. Why is this so critical to my investment philosophy?
If you look at the studies by economist Hendrick Bessembinder, the data show that the entire net shareholder value creation over the past century was concentrated in just 4% of stocks. If your time horizon isn’t 100 years, this power-law concentration is smaller, but it is still very concentrated. Any investor in the “long-term buy-and-hold” camp should think carefully about this power-law dynamic. To truly succeed, you need long-term exposure to these few huge winners. That is essential if you’re a long-term investor who doesn’t trade in and out, because that’s where the value creation happens. Without these outlier winners, the stock market would generate negative long-term returns.
Now, how do you select the 10-baggers and even the 100-baggers? I think it’s nearly impossible and largely comes down to luck. If you’re fortunate enough to select one or two of these winners, then it’s probably even harder to hold onto it without trimming your position, causing you to never realize the big payoff of its optionality.
So, what can you do? I believe—and again, I can’t prove this—that selecting companies with extraordinarily passionate management and people slightly increases the probability of being exposed to these outliers. I think long-term success requires long-term thinking and great decisions accumulate over time. Beyond that, though, you probably need a good amount of luck too.
Another thing central to my investment philosophy and style is what I call the “bag of optionality.” It’s not described in my book but is detailed in my investor letters. I tend to gravitate toward cases where one part of the business acts as the profit engine, and then there are other parts—either geographically diverse operations or entirely different subsidiaries or investees—that drag current earnings, but each has a lot of diversified optionality (i.e., somewhat independent operations with highly potential outcome ranges). The situations I like are those where it’s evident that this earnings-dragging “bag of optionality” is implicitly capitalized as a gigantic liability by the stock market. An option cannot be worth less than zero—certainly not a highly diversified portfolio of options. Yet the market often heuristically applies a “that’s how it is, duh!” discount to these “bag of optionality” cases. I especially like situations where the “bag of optionality” is coupled with share buybacks grossly below NAV, which magnifies the long-term per-share optionality.
What’s a famous investment rule you don’t agree with?
Simon Kold: I’m a big opponent of dogmatic rules (for context, I have a degree in Theology, so I hope I know a thing or two about dogmatism). I don’t think dogmatism leads to success in investing. Success comes from knowing your limits and avoiding errors by not putting yourself at a disadvantage. Of course, strictly following some rules can help with that. But I see many investors dogmatically following all kinds of rules without ever questioning “why?”
I consciously try to limit my reliance on rules, except for the rule about knowing your own limits. Blindly following rules without questioning them is something I frequently make fun of. You’ll see that reflected in my book as well, where dogmatic and heuristic tendencies become the usual victims of my satire. (For context, in my 20s, I performed a niche style of stand-up comedy here in Copenhagen and on national Danish TV, and I accidentally ended up using humor in the book.)
Which key characteristics should a good investor have?
Simon Kold: Good investors do it for the right reasons. They must love the analytical process. They must love the emotional process. They must love the process more than the outcome.
Second, a good investor should have the ability to take pain. They should take some satisfaction when things go against them or when they look like a fool. If they have conviction in something and, for years, it appears they were wrong—while others doubt them or lose faith—they shouldn’t feel dissatisfied but instead take some joy in being the underdog. Most importantly, they should not let external opinions shake their judgment too much. They can’t rely heavily on what others think of them.
Third, a good investor should have the capacity to change their mind and admit when they are wrong—to themselves and to others. You often see people fall into a kind of hole where they can’t admit mistakes. They become shell-shocked when something goes against them, unable to make decisions, and effectively paralyzed. A good investor should be able to move on.
Fourth, great investors are not overly dogmatic. They question the world rather than recite the same mantras over and over again. I see many people in the investment world who have become the equivalent of totalitarian religious fanatics. Rigidly following established rules denies you the opportunity to gain a unique perspective on something. Dogmatism puts you in a position where having a differentiated view is simply impossible. So, it puts you at a huge disadvantage
What’s your favorite quality stock right now?
Simon Kold: I would prefer to keep that to myself. I have imposed a rule on myself not to talk too much publicly about my personal conviction ideas. It’s not because I don’t like sharing them, but because being so public about something I currently have conviction in could make it harder for me to change my mind later.
I will sometimes be forced to do it, like in my investor letters, but I try to minimize it whenever possible, such as in interviews. I hope you appreciate my response, even though I didn’t directly answer the question.
Any book recommendations to share with our audience?
Simon Kold: Of the classic canonical investment books, I would recommend The Essays of Warren Buffett and Poor Charlie’s Almanack. Most of your readers have probably already read those, so if I’m trying to suggest something they might not have read, I’d recommend Winning on Purpose by Fred Reichheld. I came across this book recently because someone mentioned that my chapter on Value Extraction Risk reminded him of it. I read the book, loved it, and just wished I had discovered it earlier so I could have included it as a recommendation in my own book.
Another usual-suspect recommendation is Factfulness by Hans Rosling. It’s kind of a classic now, but it’s not an investment book, so maybe your readers haven’t read it. It introduces the concept of the “gap instinct” and is an amazing resource for self-correcting how you view the world—not just in investing, but more broadly. I think it’s a total must-read for everyone and very useful in the context of investment analysis.
If academic studies count as recommendations, then I would urge your readers to explore the work of Hendrik Bessembinder. His studies are freely available online and incredibly humbling for investors. They have major implications for practitioners.
Where can people find out more about you and your book?
Simon Kold: They can buy the book at most online book retailers. It’s also available as an audiobook starting December 24 on Audible and other audiobook platforms.
I’ve done some podcast appearances and interviews in connection with the book launch. I’ve since created a personal author website, simonkold.com, to aggregate links to these podcasts and articles in one place.
My investment firm is called Kold Investments, but I want to emphasize that I’m trying to separate my role as the author of the book from my work at the investment firm. So any inquiries related to the book should be directed through LinkedIn or other channels—not through Kold Investments.
Everything In Life Compounds
Pieter
Whenever you’re ready
That’s it for today.
Whenever you’re ready, here’s how I can help you:
Thank you for reading!