Podcast Transcript: Arne Ulland on Risk Management, Long-Term Investing, and Rational Thinking | Stockup

Disclaimer: The transcript below was generated and refined using AI tools and may partially deviate from the original conversation, which took place in Norwegian on November 18, 2024

Speaker 1 - Faruk
Hi everyone, and welcome to Stockup! We’ve got a truly fantastic guest with us today. I managed to convince him to come back. The one and only Arne Ulland—the greatest of all time, at least in Stockup’s history!

I can confidently say he’s our most listened-to guest. Arne, welcome back! It’s a pleasure to have you here again.

Speaker 3 - Arne
Thank you for that introduction! No pressure to live up to any of this, right?

Speaker 1 - Faruk
No pressure at all!

Speaker 3 - Arne
Exactly!

Speaker 1 - Faruk
For those who missed the last episode, let me give a quick recap. Arne, your portfolio is up about 34% this year, which far surpasses the indexes. Over five years, you’ve achieved a 185% return, and over the past decade, an annualized return of 15%.

I have to say, that’s incredibly impressive. But I understand you’ve made some changes to your portfolio since we last spoke. Would you mind giving our listeners a quick overview of those changes?

Speaker 3 - Arne
Sure. Last year, we talked a lot about two companies in particular: Lifco and Brødrene A&O Johansen. Both of those are out of my portfolio this year.

Let’s start with A&O Johansen. It turned out to be a relatively good case. The stock went from about 50-60 Danish kroner to 80-90 kroner, and that’s when I sold.

It’s still a decent company, but in their recent presentations, I’ve found the leadership to be unclear. I can’t stand unclear leadership. When they make it hard for shareholders to understand the company’s direction, it’s a red flag for me.

For instance, they might say, “We’re doing great, but the market makes it difficult to raise prices.” Meanwhile, the top line grows, but the bottom line stays flat. They blame the market without providing any timeline for when profitability will improve.

I can’t invest in a company where pricing is dictated by external factors instead of internal efficiencies like cost control or price increases.

So, when the stock price went up, the risk went up too. I decided to exit the position.

Speaker 1 - Faruk
That makes sense. And what about Lifco?

Speaker 3 - Arne
Lifco simply became too expensive. It’s had a great year—up around 30%—but when I calculated forward returns, I couldn’t see getting more than 6% annually.

In today’s market, that’s not attractive enough for me. I maintain a watchlist of stocks I’ve sold, so Lifco isn’t off my radar. If it falls to around 272.90 Swedish kroner, I might re-enter. But at 330 kroner with a risk-free rate at 5%, it doesn’t make sense to hold.

Speaker 1 - Faruk
You’ve touched on an interesting topic—risk management. When stocks get expensive, it often becomes a balancing act. With A&O Johansen, you mentioned leadership clarity. Is that a consistent dealbreaker for you?

Speaker 3 - Arne
Absolutely. There’s a great book by Shane Parrish called Clear Thinking. Clarity isn’t just important in finance; it’s vital in everything.

For example, in consulting, when you interview someone or discuss strategies, you notice the difference between clear and unclear thinkers. People who ramble or use endless qualifiers make you doubt their grasp of the subject.

When I reviewed A&O Johansen’s presentations, it felt like there were no clear conclusions—just a lot of noise. That made me lose confidence in their leadership.

On the flip side, a clear strategy like “We’re facing challenges now, but here’s our plan to take market share and improve returns” gives me confidence. That’s the kind of leadership I back.

Speaker 1 - Faruk
That’s an excellent point. And speaking of clear strategies, Lifco is known for being a serial acquirer. It’s a favorite among our community, alongside companies like Lagercrantz and Investor AB. Why did you feel comfortable selling Lifco, given its history of strong performance?

Speaker 3 - Arne
It’s tough, but if you’re a fundamental investor, price matters. When a stock’s price exceeds its intrinsic value, the risk increases.

My approach involves calculating expected returns at various levels—6%, 8%, 10%, and so on. If Lifco offers 6% while another opportunity, like Visa, offers 12%, I make the switch.

During this time, serial acquirers across the board had risen, not just Lifco. It became clear the entire sector was overvalued, not just one company excelling.

Speaker 1 - Faruk
How did Visa catch your attention during this period?

Speaker 3 - Arne
Visa had a significant drop due to a lawsuit. While the stock faced a lot of negative sentiment, my analysis showed the issue was short-term and wouldn’t impact long-term fundamentals.

Switching from Lifco to Visa was a no-brainer. Visa was undervalued, with a potential 12% annual return, compared to Lifco’s 6%.

When you make these decisions, it’s about allocating capital where it makes the most sense.

Speaker 2 - Kenneth
Interesting reasoning. I want to touch on your thoughts regarding price drops. What’s your perspective when stocks fall further after you’ve made an initial investment?

Speaker 3 - Arne
That’s something I see a lot of people struggle with—they fear the stock might drop even more after they buy.

I’ve said this during the COVID crash and many times since: I don’t care if a stock drops further after I buy, as long as I’ve assessed its fundamental value.

The key difference lies in distinguishing between a value trap—where a company’s fundamentals deteriorate—and an opportunity, where earnings and financial stability remain intact despite a stock price drop.

When prices drop because of market noise rather than fundamental issues, that’s when I lean in. It’s about separating what’s happening fundamentally from the market’s reaction.

Speaker 2 - Kenneth
That makes sense. Speaking of fundamentals, a company like Evolution Gaming has faced challenges recently. It’s a fan favorite, but its growth seems to be slowing. What’s your take on that?

Speaker 3 - Arne
The question is, is Evolution struggling, or are the investors in Evolution struggling?

Sure, their growth has slowed from 50-70% to 10-20%, but they’re still doing well financially. As long as growth stabilizes at a reasonable level and there’s no drastic earnings decline, Evolution remains attractive.

The current price reflects a lot of negative sentiment—strikes in Georgia, grey market concerns, etc. But if those issues have already been priced in, the margin of safety becomes substantial.

What I focus on now is revenue growth and EPS. If those metrics start halving or stagnating consistently, then we have a problem. But at current levels, I see a lot of potential upside.

Speaker 1 - Faruk
That’s a great perspective. You’ve mentioned before that statistical reasoning plays a significant role in your valuation process. Can you elaborate on how you apply that in your analysis?

Speaker 3 - Arne
Sure. Valuation is about understanding probabilities rather than fixating on exact point estimates.

For example, take Visa. Analysts might say the bear case value is $200, the base case is $300, and the bull case is $400. But these are just three points on a range, not fixed probabilities.

If you think about it statistically, most outcomes will cluster within a specific range rather than hitting an exact target. This concept applies across all areas of life.

For instance, if I estimate my commute takes 30-60 minutes but averages 45, the actual time will almost always fall within 40-50 minutes. Stocks are similar—valuations are rarely precise but cluster around a range.

The key is to recognize extreme scenarios for what they are—outliers. If a stock is priced well outside its expected range, either high or low, that’s where opportunity or risk lies.

Speaker 1 - Faruk
That’s a helpful analogy. Do you base this primarily on your models or also rely on analyst estimates?

Speaker 3 - Arne
Both. During the COVID crash, for example, it was obvious that pessimism was baked into prices.

You’d see great companies trading at P/E multiples of 8-10 instead of their usual 20. That kind of mismatch screams opportunity.

Ultimately, it’s about recognizing when price and value diverge significantly. When a company’s earnings are stable but the market prices it like it’s going bankrupt, it’s often a buy signal.

Speaker 2 - Kenneth
I like that. And it ties into normal distributions—most outcomes are within a range, with extreme deviations being rare.

Speaker 3 - Arne
Exactly. When I bought Olav Thon during COVID for 100 NOK, it was trading at 0.4 price-to-book, compared to its usual 1.

At that level, the market essentially priced it as if many of its properties would stop generating income for the next decade. That scenario was highly unlikely, so the price was a clear overreaction.

Speaker 2 - Kenneth
How far ahead do you typically model when valuing a company?

Speaker 3 - Arne
I usually look five years out, but my process isn’t overly complicated. It’s more back-of-the-envelope than intricate Excel modeling.

I’ll estimate current EPS, project growth based on historical trends, and apply a range of potential P/E multiples to see where the valuation might land.

This approach gives me a distribution of outcomes, helping me identify what’s realistic and what’s an outlier.

Speaker 2 - Kenneth
That makes sense. And speaking of growth, companies often go through different phases—early growth, rapid expansion, maturity, and decline. How do you think about adjusting multiples as a company transitions through these stages?

Speaker 3 - Arne
That’s a great question. The way I invest doesn’t involve chasing fast-growing companies, so I don’t typically need to adjust for those rapid early-growth phases.

High-growth companies tend to attract significant attention and competition, which can lower their growth prospects over time. Instead, I focus on companies with stable growth over a decade or more.

For me, the key is consistency—stable growth, steady margins, and solid returns on invested capital. If a company consistently shows these traits, I can have confidence in its ability to maintain its trajectory without worrying too much about a transition phase.

Speaker 1 - Faruk
So your process skips those speculative phases entirely?

Speaker 3 - Arne
Exactly. I avoid situations where a company’s growth is too dependent on factors outside its control, like external markets or macroeconomic conditions.

Take Lifco, for example. It’s a stable compounder with a proven business model. I sold it recently because it got too expensive, but I’ll buy it back when the valuation aligns with my expected returns. That’s the beauty of focusing on companies with predictable long-term growth.

Speaker 1 - Faruk
And what about now? The market seems to be booming, and investors are generating 20-40% returns annually. Doesn’t that make it tempting to jump on the bandwagon?

Speaker 3 - Arne
This is one of the most dangerous times to invest.

When everyone is making money easily, it’s usually a sign of heightened risk. The stock market is, at its core, a market—when there’s a flood of buyers, prices rise, and opportunities diminish.

I prefer markets where skepticism reigns. When optimism is rampant, risk often goes unnoticed, and people start taking on excessive exposure.

Speaker 1 - Faruk
That ties into Warren Buffett’s famous line about finding out who’s swimming naked when the tide goes out.

Speaker 3 - Arne
Exactly. That’s why I focus on fundamentals. When prices deviate significantly from intrinsic value, the margin for error shrinks.

It’s better to invest during periods of uncertainty when prices reflect doubt rather than unbridled optimism.

Speaker 2 - Kenneth
So how do you balance being fully invested while managing risk in such an environment?

Speaker 3 - Arne
It’s all about opportunity cost.

I’m always fully invested, but I actively evaluate whether my capital is optimally allocated. If one stock’s expected returns diminish due to overvaluation, I’ll shift capital to another with better prospects.

For instance, I recently sold Lifco and reallocated to Visa after its price dropped due to litigation concerns. I saw that Visa’s risk was temporary and mispriced, so it was an easy decision.

Speaker 1 - Faruk
Visa is now a significant part of your portfolio, isn’t it?

Speaker 3 - Arne
Yes, it’s close to 30% of my portfolio now. It’s rare for me to allocate so much to a single stock, but Visa’s fundamentals and my confidence in its business model justify it.

When I see an opportunity where the downside is minimal and the upside is substantial, I’m willing to take a concentrated position.

Speaker 1 - Faruk
Let’s pivot a bit. You’ve mentioned discipline multiple times in this conversation. How does that play into your process?

Speaker 3 - Arne
Discipline is everything. It’s about avoiding situations where you’re likely to make mistakes.

For example, constantly looking for new investment ideas can lead to decision fatigue, which negatively impacts judgment.

I stick to a small universe of companies—typically 70-100—and only make changes when there’s a compelling reason. This minimizes unnecessary decisions and allows me to focus on understanding a few businesses deeply.

Speaker 1 - Faruk
That’s a powerful mindset. But doesn’t the constant influx of information and market noise make it challenging to stay disciplined?

Speaker 3 - Arne
It can, but I’ve developed habits to filter out the noise.

I rarely consume macroeconomic news because it doesn’t influence my investment decisions. Instead, I focus on understanding the companies I own and their long-term potential.

Additionally, I have rules to slow myself down. For example, if I’m considering a big move, I always sleep on it. Sometimes, I’ll wait weeks or even months before acting. This helps ensure that my decisions are deliberate, not reactionary.

Speaker 2 - Kenneth
That’s a great approach—being intentional about decisions instead of letting emotions or external noise dictate actions. You mentioned earlier that you’ve been holding Investor for quite a while. Given the current valuation, why haven’t you sold it yet?

Speaker 3 - Arne
Investor is an interesting case. It’s been a cornerstone of my portfolio for seven or eight years now, and I’ve thought about selling it when the discount to NAV narrows.

Historically, it’s traded at a 20% discount to NAV, but today it’s closer to 7%. Some people argue that this makes it overvalued, but I disagree.

Think about Berkshire Hathaway—it trades at a premium to book value because of its long-term track record and reliability. Investor has delivered 17% annualized returns over decades, so I don’t see why it should always trade at a discount.

Speaker 1 - Faruk
So you believe Investor deserves a valuation more aligned with its performance?

Speaker 3 - Arne
Exactly. There’s a behavioral bias called anchoring that can cloud judgment. People anchor to the historical discount and assume it’s the “correct” valuation. But maybe Investor’s intrinsic value warrants a smaller discount—or even a premium—given its consistent returns and strong private equity arm, Patricia Industries.

I sold a small portion recently when the discount tightened to just 2-3%, but overall, I believe holding onto Investor is the right move unless something fundamental changes.

Speaker 1 - Faruk
It’s been an incredible journey for anyone who’s held it long-term.

Speaker 3 - Arne
It really has. It’s a reminder of the importance of patience and staying invested in great businesses.

Speaker 1 - Faruk
Speaking of patience, let’s talk about Pepsi. It’s been under pressure lately due to political and regulatory risks, but some investors see it as a bargain at these levels. What’s your take?

Speaker 3 - Arne
Pepsi is on my watchlist right now, but I haven’t made a move yet.

The regulatory noise, like potential taxes on sugary drinks, could have short-term impacts on earnings. But when you think about Pepsi as a company, it’s a global powerhouse that will still be around in 10-20 years.

The key question for me is: What’s the right price to pay, considering these risks? If the market has overreacted and priced in excessive pessimism, then it could be a great opportunity.

Speaker 2 - Kenneth
So it’s more about waiting until you feel you have enough clarity?

Speaker 3 - Arne
Exactly. I need to dig deeper into the numbers and potential regulatory impact. If it turns out the market is over-discounting the risk, I’ll buy. If not, I’ll move on.

One thing I’ve learned is not to rush into decisions. If the price moves up $5 while I’m doing my research, so be it. What matters is having conviction in the decision, not chasing price action.

Speaker 1 - Faruk
That’s a refreshing perspective—letting analysis lead the way instead of reacting to market noise.

Speaker 3 - Arne
I also like to keep a rule for consumer products companies: I need to personally understand and use the products. For example, I’m more comfortable investing in Pepsi because I see their products everywhere. That familiarity helps me build conviction, especially during tough times.

Speaker 1 - Faruk
It’s interesting you bring that up. Here in Norway, Pepsi Max is a top-seller. Every Saturday, the shelves are empty after people rush to grab the discounted 8-packs.

Speaker 3 - Arne
It’s that kind of brand strength that gives me confidence. If I can see the demand firsthand, I’m more likely to ride out the storm when sentiment turns negative.

Speaker 1 - Faruk
I think that’s a good place to wrap things up. Arne, it’s always a pleasure having you on the podcast. You bring so much wisdom and clarity to these conversations.

Speaker 3 - Arne
Thank you. I really enjoy being here. It’s great to talk to people who are genuinely interested and ask thoughtful questions.

Speaker 2 - Kenneth
Will you join us again next year?

Speaker 3 - Arne
If my returns are good, I’ll be back. If not, it’ll be embarrassing, so we’ll see.

Speaker 1 - Faruk
That’s a great way to leave it—a bit of a cliffhanger for next time. Thanks again, Arne. Have a great evening and happy holidays when the time comes.

Speaker 3 - Arne
Thank you. Same to you all.

Speaker 1 - Faruk
Before we close, I have one last question. Are there any books, podcasts, or Twitter profiles you’d recommend to our listeners?

Speaker 3 - Arne
Absolutely. When it comes to books, one of my all-time favorites is The Joys of Compounding by Gautam Baid. It’s a book I revisit every year because it’s not just about money—it’s about how the compounding principle applies to every aspect of life. Whether it’s building better habits, improving relationships, or investing, small, consistent improvements lead to exponential results. It’s a powerful mindset.

Another book I’m excited to read is Die With Zero by Bill Perkins. It challenges the idea of hoarding wealth and instead focuses on using money to create meaningful experiences while you’re alive. I’ve always been a disciplined saver, but this book emphasizes finding a balance—spending wisely while still planning for the future.

Podcasts? Invest Like the Best by Patrick O’Shaughnessy is a must-listen. The guests are diverse, and the insights go far beyond investing. Another great one is Founders by David Senra, where he extracts lessons from the biographies of some of the world’s most remarkable individuals. He’s incredible at weaving personal stories into practical takeaways. And then there’s The Knowledge Project by Shane Parrish, which dives into decision-making, mental models, and life strategies.

On Twitter, I highly recommend following Compounding Tortoise. His posts are thoughtful and often explore long-term investing principles. David Senra is another great follow—he shares snippets from biographies and insights into the lives of founders and business leaders. Lastly, there’s Tiho Brkan, who emphasizes the mental side of investing—decision-making, discipline, and the importance of having a holistic approach to life and wealth.

Speaker 1 - Faruk
Those are fantastic recommendations. I’m sure our listeners will find value in them.

Speaker 3 - Arne
I hope so. At the end of the day, investing isn’t just about money. It’s about mindset, discipline, and making good decisions consistently over time. If these resources can help people think more clearly or act more intentionally, then it’s worth sharing them.