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RV Capital Semi-Annual Letter: Business Owner TGV Vs. The DAX

RV Capital letter to investors titled, "Business Owner TGV Vs. The DAX," for the first half ended June 30, 2015.

Dear Co-Investor,

The NAV of Business Owner was EUR 374.75 as of 30 June 2015. The increase in NAV was 25.1% since the start of the year and 274.8% since inception on 30 September 2008. The Dax was up 11.6% and 87.7% respectively.

RV Capital - Development of the fund’s participations

The following table shows the net income development of the fund’s holdings at year-end 2014 in order of importance.

When I buy part of a company, my investment hypothesis is always the same – it is a great business with wonderful managers at an attractive price – though of course not always correct. Having taken the plunge and bought a stake, I then track the development of the company versus this hypothesis. Has the company expanded its market and/or products and services? Are costs under control? Has management allocated the company’s capital sensibly?

Where the rubber hits the road is the companies’ earnings. A discussion of these is the main theme of this letter.

If the hypothesis is playing out, then earnings should be going up. This need not be the case every year. In particular cyclical companies such as Bayerische Motoren Werke AG (ETR:BMW) (FRA:BMW) will occasionally have down years as people put off major purchases, such as a car, in a recession, but over longer periods the direction should be up.

Note that I have no interest in the development of share prices. This is why I don’t waste your time with a discussion of the fund’s or individual company’s price development. If a company regularly increases its earnings power, the share price will track this over time. A robust investment process correctly identifies companies which increase their earnings power. A rising share price is the outcome. My sights are firmly trained on process. Confusion between process and outcome is the single biggest source of error in the stock market. After all why not keep buying that hot biotech company with no hope of making money if the share price keeps going up? What’s not to like? A complete loss of capital when the party stops is what’s not to like.

RV Capital - Grenkeleasing

Grenkeleasing had a fantastic year. It grew net income at a whopping 38%. This was underpinned by strong revenue growth of 20% and a slower increase in costs. Grenke has been investing heavily in new markets and services in recent years as a result of which its return on equity (“ROE”) troughed at 11% in 2013 vs. an internal target of 16%. ROE was 13% in 2014 indicating that it continues to invest whilst at the...