Podcast Transcript: Long-Term Investing Insights with Arne Ulland on StockUp

This post presents an edited transcript of my appearance on the Stockup podcast, where we discussed quality investing, serial acquirers, and beyond. The transcript has been rapidly edited.

Date: 12/2023
Podcast in Norwegian here:

Click here to read this interview in PDF format
Interview

Speaker 1/Faruk: Today, we have a special guest, namely Arne Ulland. He's a pillar and an inspiration to many small investors. He'll have the opportunity to share a bit about himself, but just consider this: over 5 years, he has achieved a return of 147% and outperformed the market by 31%. There's little doubt that this Arne knows which stocks to pick and how to crush the market over time. So, Arne, the floor is yours.

Tell us a bit about yourself, when did you start your investment journey, and what motivated you to begin?

Arne: I'm 31 years old, originally from Brønnøysund although I lived the first 8 years of my life in Stockholm. I currently reside in Oslo, married, and hold a degree in Business Economics from NHH with a specialization in finance.

I worked as a stock analyst in an investment bank in Oslo, right in the midst of the IPO boom in 2021 with renewable energy companies. There were a lot of stock placements and capital raising during that time, but I realized quite early on that working on the sell side wasn't for me.

My focus and interest in investing revolve around long-term strategies, quality, and optimizing for simplicity. I have relatively little interest in macroeconomics.

Now, I work as a management consultant, which essentially means being a problem solver. Typically, I help companies do system implementations, become more profitable, change management, and operational improvements.

Regarding my investment journey, I actually thought I started around the age of 17-18, but a friend told me this week that I used to read investment books in 9th grade, so it might have started as early as around the age of 14.

I believe my interest in investing stemmed from a strong inclination toward saving from an early age. Growing up, we didn't have much money, so saving as much as possible was very important to me.

My focus on saving and the compound interest effect started around the age of 7-8. I remember being quite fanatical about filling up a red piggy bank with coins and enjoying seeing it grow bigger and bigger.

As for buying stocks, I probably bought my first stock around the age of 17-18, likely based on technical analysis or something similar. I believed back then that the key to stock analysis was only to follow price movements. This effort proved to be futile, which wasn't surprising as the price doesn't necessarily correlate with the actual operations of the company. As Peter Lynch says, "The stock price is the least useful information you can track, and it's the most widely tracked."

I've been investing for about 14 years now, and my investment strategy focuses a lot on quality, which I mainly shifted towards in 2017.

Speaker 1/Faruk: How would you describe yourself as an investor? What characteristics or feelings should a good small investor have in your opinion?

Arne: My focus is on quality and what is known as GARP investing, which stands for Growth at a Reasonable Price. Total return is what matters to me.

If I were to highlight three personal traits as an investor, first, it would be what Munger calls the deferred gratification gene. He says, "Few people have the deferred gratification gene: 'It's waiting that helps you as an investor, and a lot of people just can't stand to wait. If you didn't get the deferred gratification gene, you've got to work very hard to overcome that.” Many struggle with being patient, thus gaining little benefit from companies that can reinvest capital at very high profitability.

The second thing is what Franchis Rochon calls the tribe gene, where some are a bit immune to "the call of the herd." Simply put, while the herd goes left, one can go right without much trouble. It's about being comfortable going your own way.

The third is that I highly value the compound interest effect and care a lot about things growing slowly but surely. I'm a big fan of the idea that the faster wealth is created, the more likely it is to come from luck, and that it will be reversed quickly as well.

To quote Morgan Housel: “The higher the monkey climbs on the pole, the more you can see its ass.”

Speaker 1/Faruk: Would you say you're somewhat contrarian, or would you rather join companies with a certain momentum, for example, in artificial intelligence? Do you think there's a bubble forming, or is there genuinely enough revenue and money in those areas to find value?

Arne: Well, I do believe that. Many say being contrarian means always doing the opposite of the consensus. That’s not my focus, but it's often the case that news, macroeconomic factors, and so-called stock experts might say it’s time for a recession, so everyone should sell everything. Then, things become incredibly cheap, and everyone's selling, but soon enough, it rebounds by 30%, and suddenly it's time to buy. It’s more about not being swayed by media frenzies, not getting caught in the panic or greed that grips everyone simultaneously.

Regarding AI, I've taken some AI courses through Microsoft because I wanted to learn and understand how it can be implemented in a business. There's definitely a lot of potential for production optimization. However, I might not invest in it simply because I don’t fully understand what I’m buying into. It feels more like hoping for the best without being able to accurately predict outcomes, which can be quite stressful. This makes every quarterly report a psychological vulnerability. I think it’s challenging to have true conviction in such investments; it’s more about hope. I've consumed many podcasts and books, but jumping on a trend when everyone's talking about it isn’t my style.

Speaker 1/Faruk: Do you think it's a case of the greater fool theory?

Arne: Yes, it’s like this story we learned about a village of 100 people where the first person buys a horse and sells it to the next, and everyone makes money until the last person is left with a horse bought for millions and no one to sell it to, leading to a total disaster. That’s what happens when investments are purely based on price speculation without underlying value, which is why I stay away from things like Bitcoin. I can see its value in deregulating markets, but I wouldn’t want to be part of something that doesn’t let me sleep at night. It's important to remain rational and not let money ruin your sleep. Investing is largely about psychology, not just mathematics.

Speaker 3/Kenneth: That’s very true, and we see this reflected in statistics too – investors becoming increasingly short-term oriented, with the average holding period getting shorter. They trade more frequently. This goes against the principle of compounding interest, making it hard to see investments grow if you’re constantly moving in and out of positions.

Arne: Exactly. Peter Lynch said that the financial climate has become as volatile as the weather, with constant reporting and adjustments needed. It makes people overly concerned about potential storms, leading to irrational decisions based on fear of what might come next.

Speaker 3/Kenneth: Right. It’s like that differentiation gene, isn’t it? If you don’t have it and see red numbers in your portfolio, panic sets in quite early.

Arne: And then there's profitability. For example, implementing a strategy change in a business can take 3 to 4 years to see the effects. So, if you sell just a few months after an announcement of a significant operational investment, you'll miss out on the benefits of automation choices, for example.

Speaker 3/Kenneth: Right? If you could delve a bit more into your investment process and criteria. What do you look for? What do you like and dislike?

Arne: The first is about margins - stable margins and having some breathing room. For instance, I'd use an operational margin of around 50-60%, aiming for a 20-30% range. This is about having a cushion, so when prices rise, and higher costs kick in, if you're operating with a 2% margin, there's not much room for maneuver when things turn. Stable margins are crucial.

Then, predictable high free cash flow is vital; generating cash is fundamental. High and stable return on invested capital is incredibly important, along with attractive growth opportunities and low debt levels. Regarding debt, I believe net debt to EBITDA should be max 4, preferably under 2. It's just that debt often turns good companies bad. They get overly optimistic, take on too much debt, aiming to grow too fast, and it tends to backfire. And if you look at companies without attractive growth opportunities, like tobacco companies, they have fantastic free cash flow, great margins, and stable profitability. But the growth opportunities aren't high, so you don't get those outstanding total returns year after year. Mostly, you get dividends, while the share price tends to stagnate, resulting in a 7-8% return annually instead of a combination of dividend yield and EPS growth. So, those are the key aspects I focus on. We can dive into more details later, or should we go into them now?

Speaker 1/Faruk: Go ahead. Let's delve into those details. We're building around that, but it's good to hear you expand on them, yes.

Arne: Certainly. Strong competitive advantages, or moats, are very, very important. Then, there's what they call "antifragility," meaning relatively stable operations throughout the market cycles.

I'm talking about the recession, boom, and recovery phases. Companies like Johnson & Johnson or McDonald's, which arguably do better in downturns, are typical examples of firms that perform well consistently. Cyclical companies, which do very well when times are good and terribly when not, I believe, wear down your psychological resilience to withstand bad news. So, stay away from those.

Leadership with a long-term outlook, talking about free cash flow over years rather than months or quarters, focusing on free cash flow, is crucial. A long history of good operations and results provides security that the business model is sound and working. Understanding what the company does and ensuring profitable operations are key. High return on invested capital, growth in earnings per share (EPS), and free cash flow per share are essential. If a company grows with high capital returns, the earnings can be reinvested, creating a compounding effect. That’s why leverage and capital allocation matter; I don't want companies taking on debt to pay dividends.

With buybacks, it's great if they buy when shares are cheap, not at the peak. I'm quite strict with that. Seeing companies buying at the top often indicates incentive schemes enriching management at shareholders' expense. Then, serial acquirers I appreciate, like Constellation Software or Berkshire Hathaway. They're rational about purchases, buying only when it's cheap, unlike many who pay whatever. They're skilled at integrating and improving acquired companies. For instance, Constellation isn’t just one company; it’s hundreds within one if not thousands and such you diversify risk. Serial acquisition is something I've grown to value more in the last few years.

Speaker 1/Faruk: Those were really great, great reflections, Arne. You mentioned McDonald's and Johnson & Johnson in relation to moats and such. Can you give an example of a company you believe has the best profit margin where you feel the leadership has been exceptional and has impressed you personally?

Arne: Of course. You have, actually, Lifco, which is an exceptional company. They have been around for a long time, acquiring companies at a steady price consistently and expanding their portfolio. Then there's Constellation Software, which, admittedly, people thought would slow down because it got so large.

The main issue with serial acquisitions is that it works well when you're small, but as you start buying bigger companies and do it over time, doubts about the business model begin to surface. People think there won't be enough viable candidates, but from what they say, there seems to be plenty still. It's a company I've never seen manage such high returns on invested capital so well, generating an insane amount of free cash flow year after year, just growing larger.

Then there's Visa, of course. I'd say Visa is everything an investor could want. You've got great growth, fantastic margins at both gross and operational levels, low debt, and this effect of growing 10-12% a year while returning over 20%. This creates tremendous value. They're also smart about buybacks and have this megatrend behind them. It's the kind of company that's in your pocket every day; you just need to look around a bit. It really helps if you've tried various products.

For instance, I have very little faith in PayPal because I've transferred quite a bit of money to Japan while my partner was there, and there's no reason I'd use PayPal over TransferWise, which has lower fees and is much faster. You might see PayPal has some B2B, but as a customer, it was completely off the table because it was much more expensive. So, I really want to invest in companies where, as a consumer, I'm sort of trapped, they just take a small part of it without me even thinking about it. That's the good stuff.

Speaker 1/Faruk: Yes, no, I totally agree with you. I just bought into Visa recently, my latest addition to my portfolio. And it's kind of what you touched on regarding Terry Smith and price action. It's always annoyed me that Visa is so damn expensive all the time, but all these exceptional companies are expensive for a reason.

Arne: The thing is when you have a very high return on invested capital, that P/E ratio, in the long run, becomes much lower over time. What happens then is that you might start with a P/E of 20 one year, then it might be 18 the next year, then 13 the third year, and suddenly you're at 12 in the fourth year. Visa isn't expensive, and I'd say you're crazy if you're not willing to go for 18 for Visa. So, one must shift their mindset a bit from this 12-month perspective, which is really only something analysts need to adhere to. That's because they have to publish reports and are generally not allowed to look further than 12 months ahead. But as a private investor, it's all about pushing forward and trying to broaden your horizon.

Speaker 3/Kenneth: A really good point

Speaker 1/Faruk: Arne, how would you describe your total portfolio? Tell us a bit about the positions you hold and why you chose them. Do you have a favorite among them?

Arne: Well, I hold a bit of this and that. Investment companies, for instance. Investor AB, for example, is an investment company of the Wallenberg family. It's Swedish. They've been around for over 100 years and are incredibly skilled. Sometimes, you need to zoom out a bit and think about who works in these companies. The people working there are absolutely the best in finance in Sweden, and here you can buy one of these companies at a significant discount, often below the intrinsic value. You don't really need to do much more than just focus on supporting them over time and be aware of when the discount to the net asset value, the underlying value, if the sum of the value of their invested and listed stocks, compare it to the price of Investor, and you see that you can buy it.

And yes, focusing on that can yield a good return over time. And then, my biggest position is AJ Johansen, which is a very untraditional stock for me to own. A Danish small-cap, a wholesaler. But the thing here is that they were really cheap, trading at a P/E of 6-7. In addition, they have a CEO around 84 years old who's been crushing their competitors year after year. They've been around for a long time, and they excel at all these operational things I care about. They manage to move their goods much faster. They've invested in a huge warehouse, unlike anyone else. This means they have the opportunity to automate, making operations much more efficient. And they're smart about buybacks and EPS, and right now, they're in a tough period because of macro factors. Analysts seem to only look a year ahead at most, but this is a company where I feel very confident in the management and that we have a good product, unless there's a real estate or housing crisis worse than now, which would take a lot. When nothing sells, as Real Estate Norway says, we're in a real crisis, and that's when you should buy quality companies. And I think the reason it's not higher is simply because it's a small company that doesn't fit the big funds' criteria.

And then there's Bouvet, which I haven't mentioned, but it's an amazing IT consulting firm. They specialize in advising on Microsoft 365 platforms and how to use the Power Platform, for which I took a course to understand more about what they offer to companies. There's so much demand for their services that I can't see them not staying busy going forward.

And of course, there's Atlas Copco, part of Investor AB, a Swedish giant that just keeps rolling. If you look at the fundamentals, it's just right. It's a matter of buying when it's not too expensive, and "not too expensive" might mean paying a P/E of 20-25 for fantastic returns on invested capital, quite similar to Visa. So, I believe my portfolio will stand strong.

The best thing about serial acquirers is that a market where things are cheap is best because, during a crash, private companies, which are usually traded cheaper than listed ones, become more attractive due to rising interest rates. They can't pay their loans, but also, listed companies become much cheaper. All in all, that’s good for serial acquirers. A market crash is the best time for them, and they do quite well when the market goes up too.

Speaker 3/Kenneth: Right? It's really fascinating. I've looked over your portfolio, and one of the first things that struck me is your focus on conglomerates and serial acquirers, as you've discussed extensively. I also find those business models very interesting because you can imagine the negotiation position. You're a giant, and then there comes a tiny company, and you almost set your own price. You buy them cheap, scale them up, inject some expertise here and there, provide them with better services and operational focus, and their customer base grows, turning it into a fantastic investment. That's really it.

Arne: Exactly, that's right. These are fantastic companies because if there are many companies trying to buy, generally, it's the seller that benefits, while the buyer often loses quite a bit before ending up paying what the company is actually worth. But then you have ones like Lifco, which have a model for what they buy. They have a price they won't exceed. I don't need to say exactly what it is, but they have criteria, and companies that don't meet them are ignored. What's common among them is two things.

First, they're a safe haven, meaning if you run a family business and you're getting older, around 60-70, and you want your business to continue but don't want to hand it over, especially not to a fund that will just pump it with debt and try to extract as much profit as possible before selling it on. You'd rather it continues to exist, the name to last. You hope that in three generations, it will still be there. Then you sell it to these types of companies like Lifco or Constellation because they're just collecting excellent companies. They often have a lot of respect for the people running them, and what they practice is not centralization, but decentralization, which is about management, accountability, and decisions not being made at the top but possibly in the departments. That's why in Constellation, it's said to be a brain with many branches. It means that while there are decisions made at the top, many sub-departments are allowed to make acquisitions without top-level approval, enabling escalation and scaling.

It's fantastic if a company isn't just run by the top brass but is independent enough to grow in many directions, which is what decentralization is about. It's super interesting to explore company structures, where management sits, and where decisions are made because if there's centralization, maybe 3 companies get bought up efficiently, but as more companies are acquired, you need to distribute responsibility. If it's given to people who aren't skilled or motivated enough, perhaps because they're paid well but have no incentives like options or ownership, they might not be driven to make good acquisitions. That's the problem with centralization; there's a lot of motivation at the top, but at the bottom, it doesn't matter as much. So, turning that around and really spreading out responsibility and incentives is very, very challenging, which is why it's hard to replicate these companies, even though many try. You can read Lifco’s playbook, but culture isn't easy to copy.

Speaker 3/Kenneth: Yes, very true. It reminds me a lot of listening to Berkshire Hathaway's Q&A sessions and hearing you talk, Arne. It's really cool, but it reminds me of the real good conglomerates like Atlas Copco. We've talked about Broadcom in the podcast, and those at the top are very skilled at capital allocation and setting up good teams everywhere, which is crucial for getting the return on capital and investments to develop in the right direction. Often, these big giants fail because they make too large acquisitions and can't integrate them properly.

Arne: I just wanted to say that because you mentioned it earlier, but for serial acquirers, scaling is the number one concern regarding why the growth story might halt and why we can't justify a P/E of 25 or 30. It's very challenging to sustain over time, making it incredibly important to have people throughout the organization who can scale independently. What CSU does so well is that they in companies and let them continue as they are but provide guidance, capital, and a vastly superior network of expertise. That makes them even better.

Speaker 3/Kenneth: Right? What I was wondering about, though. You've mentioned AOJ, and I understand why you went for it. But what about Bouvet, it doesn't quite fit into your structure. They have some software and can sell services, which is somewhat scalable. But you're delivering consulting services yourself, which isn't particularly scalable. You're time-limited, only having so many hours to sell. Now, you don't have us over a barrel. It's a fantastic company, but how do we get these wheels to spin as fast and as long? The others, I get it, but this one feels a bit like the odd one out.

Arne: I believe the reason they’re going to succeed is because the employees are extremely happy. They have great incentives to do a good job. There you have a bit of a decentralized model. Of course, there's a lot of centralization with a CEO at the top, but the employees are incredibly incentivized to perform well.

Speaker 3/Kenneth: Nice.

Arne: And then there's the public sector part. I don't think we're anywhere close to tapping into it. There are many tools that many haven't even started to exploit yet, like Power Automate and all those tools that streamline document handling, processes, etc.

I believe there's so much yet to be done in the public sector regarding digitalization. And since they are partners with nearly all the biggest players like Equinor, they have a reputation like no other, and the market for digitalization is large enough that yes, there are more players needed to do this job. So, I believe it's going to go well, but I completely agree that if you look at the financials, it's fantastic.

However, one must also consider the risk, as you mentioned, that you need a lot of heads. That's perhaps the biggest problem. Sure, the stock goes up, but they need to hire like crazy, and that costs a lot. What you need to do in such a case is to check profitability quarter by quarter and see what happens with profitability and growth. Try to see if you're paying for growth and just riding the trend, and the moment things start to slow down or drop, you might need to exit this type of stock. But right now, I think the arrows are still pointing up, though it's definitely the one I need to keep the closest eye on.

Speaker 1/Faruk: But Arne, you're still into Bouvet? Yes. There you have the definition of fantastic margins, for instance. There was an integration, but I have something else to add about Bouvet. We've analyzed the company on the podcast, and now... Now, you're much better at fundamental analysis than I am, but what I don't like is the dilution. You know what I mean? They essentially dilute shareholders almost every year. Do you have any thoughts on that?

Arne: I don't like it at all. I think that's something that really shouldn't happen. I'm not sure about my exact allocation, but you're talking 3 to 5%, while I have 20 to 25, up to 30 in others, so it's kind of on the bench, you could say. Those types of actions, I'm not a fan of, but at the same time, operationally it's going very well, so I'm still willing to hold them. But dilution... It's not good, especially if you're expecting the share price to increase significantly over time. I think you have a good point, and it's important to recognize that most investments aren't perfect, which is why I'm at an 18 P/E ratio, not 25-26 or 20. It's because of these kinds of issues. But I still find it attractive enough, based on fundamentals, to hold in my portfolio, just not with a large weighting.

Speaker 1/Faruk: So we agree then, not completely off the table on that one. Time is running out, but I think briefly, we have some questions, and we did a little poll on what people wanted to know, and they would like to know how you, Arne, put together a portfolio. What leads you to sell a company, for example. Just talk a bit about the psychology behind what forces you to sell when you've done your due diligence to buy them in the first place.

Arne: I sell a stock if I see poor capital allocation. It could be in the form of dividends or not buying back their shares at the peak. But mainly, it's about the valuation, and often I find that even if you project 3 to 4 years ahead, it's still expensive. I'm never too scared to pay a premium in the short term. But if you see that the company, even in 5 years, is still trading above its 5-year average, then the opportunity cost is too high to invest. So, you have to consider selling because there are many companies you can buy, and if the opportunity cost is high, you should think about reallocating. Also, if margins or profitability trends downward, if you're at 30% and it starts dropping to 28%, then 26%, and you're down to 20%, it's a significant warning sign for me. It appears they're not able to maintain the same trajectory, which means you can't expect the same historical returns you've had.

Arne: So in summary, you could say valuation, declining margins, and falling profitability are reasons for me to sell. And it's not because the market is falling. I'm actually the opposite; I start to doubt when the market is expensive, and people are optimistic, which I find scary. Unfortunately, everyone posts graphs expecting 20 to 30% returns annually. It seems like investing is pretty easy, which means the margin of safety in stocks has decreased significantly. You don't get much of a discount anymore; mostly, you might be paying a significant premium, meaning a lot has to go right for you to make money on it.

That's when I start to doubt the market, usually taking a walk, checking what's priced in, reading books and articles on long-term value creation to understand. Maybe I'm a bit too passive, and that's something I'm trying to work on with many of these serial acquirers because now I find them quite expensive. However, I try to look 3 to 4 years ahead and see that they can likely sustain their growth, with so much capital still not expensive.

Speaker 3/Kenneth: So how would you advise individual investors on stock selection? Do you have a target number of stocks? Should it be 8, 10, 12? What about diversification?

Arne: Traditionally, you're supposed to have around 25 and then 2 to 3 in each sector. That minimizes risk, and I followed that for many years. Recently, I've started to increase my concentration quite a bit. Having 25% in Lifco or 12 in Constellation or 15 in Investor AB is not the same as having that much in Europris because Lifco represents 200 companies, Investor AB 30 companies, and then there's a large unlisted portion in Constellation with 1000 companies. So, the risk profile is entirely different, but it looks like a single stock on Nordnet (broker), which seems risky. But I think it's important to consider when evaluating risk. For beginners or if you're new, I suggest starting with around 15 to 25 stocks, try it out, and build competence and conviction because it's all about building confidence over time.

Speaker 1/Faruk: For the general small investor out there, stock picking is an art, especially to achieve the returns you've had. It requires some experience, right? It's not something you master in the first, second, or third year. You mature as an investor, but there's so much talk about... We've discussed this several times over the years, but what would you recommend to the average small investor: index funds or becoming good at stock picking?

Arne: Honestly, I don't understand why more experts aren't upfront about this. If you're not particularly interested in stocks or don't see a future in it, like working with companies and trying to improve them, or more importantly, if you don't find it fun, then of course, a low-cost global index fund that offers worldwide exposure is the way to go, like the DNB Global Index or KLP AksjeVerden.

Most index funds outperform private investors, but there's something not discussed enough: index funds are challenging if you're even slightly interested in stocks because you can't stay passive, and index funds require passivity. Active engagement often ruins the whole point, leading to mistakes from impatience or slow progress.

With index funds, you don't have insight into the underlying value, so owning shares directly, like in Berkshire, lets you see the intrinsic value increase over time. Over the years, there's been a lot of volatility, but generally, there isn't much movement in the stock market looking back 100 years. And then people sell at the worst times. So, stocks might be easier.

It's an exciting hobby, offering insights into psychology, and business operations, and for people like me, behavioral psychology is the coolest part.

You learn how people think and react to crises, get to know various products, and see what makes a good company culture. It's about being eager to learn, and becoming a "learning machine."

If you're interested in stocks, you read a lot, and talk to people. We're here today discussing all sorts of things, and becoming better at conversation, which is personally and professionally strengthening. Often, focusing on saving leads to more savings as you see your money grow, whereas leaving it in an account without thought might lead to minimal monthly savings instead of a significantly higher amount. It's incredibly important.

Speaker 3/Kenneth: Totally agree, yeah. I really recognize that feeling when people start saving, right? They put their money in index funds because that's what everyone says is smart, and then they end up just watching the macroeconomy and getting stressed about whether the market will go up or down. It's like getting lost in the weeds.

Arne: Well, I invest for my family, and of course, it's in index funds because they need the absolute lowest possible risk. And someday, I'd like to pass on the responsibility, but then I get calls, especially like last year when all the analysts were saying it was going to be bad. They start asking, "Arne, shouldn’t we sell? Shouldn’t we do something?" Why should we? "Isn't something happening in Russia?" Yes, and you know that affects stock prices? "No, but it's scary." Yes, that's why the market is down 7%. That's the whole point. It's scary when you're too focused on macro and draw parallels that don't quite match up.

Speaker 3/Kenneth: Right? Well, I was about to say this about the connection and psychology. I’m very interested in hearing a bit more because I noticed, maybe it's related or not, but I noticed on Twitter that you posted a picture of your bookshelf, which has lots of interesting books, of course, but there's also a special shelf that you've dedicated to something specific. What do you have on your bookshelf?

Arne: Well, I have framed logos of my top positions, which I'm incredibly grateful my wife accepts, but beyond that, it's very important. It was something I came up with 2-3 years ago because I strongly believe in visualization.

I've printed out various things related to personal goals, and daily learning where I draw a line for each day I learn something new or exercise.

Of course, there are moments I want to trim or sell to chase something that seems more exciting, but because I have these companies framed and try to relate to them, I avoid making stupid mistakes.

Speaker 3/Kenneth:

Right, interesting. So, you're building up conviction through your process, then. And you just hold on. Do you have any tricks for when doubt creeps in?

Arne:

Well, as I mentioned earlier, not just now but previously, it takes a lot of conviction to dedicate a bookshelf to it, and that's something I've realized. It makes you truly appreciate those positions where you might have a lower allocation.

It's hard to put them on the shelf because if friends ask, "What's this doing here? Why do you have this one?" you realize you might not actually know.

It gives you a reality check on how much you understand the company and how confident you are in it. Often, it ends up with me needing to read a couple more reports. I need to become more confident about why that company deserves a spot on that shelf so that in itself is very helpful. When doubt arises, of course, zooming out helps. '

I'm generally not bothered by macro factors as I mentioned. It's pricing that affects me, like when interest rates go up, it's scary for many companies. For example, AOJ, my biggest position, there's a macro backdrop with high competition in the market and a CEO who's 84 years old. They have low liquidity in the stock, which is the only reason they're not buying back shares. So, there's doubt that they won't be able to buy back shares or that there won't be growth in the coming quarters because we might have an even better macro level than we have now. But unlike some, I don't just read the news on Finance News to understand if a company is doing poorly; instead, I try to find out in the reports and see what's already priced in.

Arne: And then I wait a quarter to hear what they say. I try to understand how much the loss actually affects them and what's priced in. Sometimes a company might signal they're going to lose 500 million, and the stock drops 3 billion because the market reacts, and that's where things don't add up. But you can't really grasp that unless you dive into the company and check for yourself.

Speaker 1/Faruk: I've been told by BTR to ask you, what do you think about real estate now? Real estate has taken a hit in the last 2-3 weeks after financial market interest rates dropped based on next year's rate cut expectations.

Arne: I used to work for a company called Funding Partner, focusing on crowdfinancing, a lot of which goes to real estate. You have to understand the risks before giving investors a return on their investment. Real estate is much harder than I thought. I don't invest in real estate and probably never will.

I learned my lesson with Entra's action, which didn't go well, and I saw that I didn't have enough control over the risks.

Real estate is complex because, yes, there might be a company at the top, but then there are subsidiaries and suppliers, and suddenly everything is more interconnected and risky than you thought. It's incredibly difficult to track risk in a real estate company, and often you have to raise interest rates because you realize the credit risk is much higher than anticipated. My take is, if you're going to do it, you need to be very good at it. I'm not, so it's not for me, even though I find it fascinating. I see Thomas Nilsen has a great fund, and many are positive about real estate, but you need to be able to articulate the risks involved clearly.

Speaker 1/Faruk: I share the same sentiment.

Speaker 3/Kenneth: I have a question for you, as it's been highly requested on Discord and by many listeners. What do you think about the "Magnificent Seven"? Is it a new "Nifty Fifty" as it was famously called in the '80s?

Arne: Actually, I tweeted about this at 7 o'clock, so it's funny you ask. There was one thing that Peter Lynch said in 1998 when the S&P went up by 25%, and it was like, 40% of that gain was related to 40 companies while 450 stood still. That was in '98.

But when I look at these top companies, Google for instance, they aren’t particularly expensive at all. On the contrary, Google looks cheap if you project a few years ahead, and it's crucial not to just look at the trailing P/E but to consider cash and debt and have some forecasts for a few years out. And think, if they can continue investing at the returns they're currently achieving, and they can box up quite a lot as they are now, then immense value will be created.

I probably wouldn't buy Microsoft as it stands now, so it's a good mix of those companies there, but now, some I would buy, or at least keep, while others might choose to sell. But I think you need to check the profitability, check the margins of these companies, and then you see it's very easy for the media to say these are expensive because they've gone up 70%.

There was actually an episode where I got quite angry because someone said that Meta had gone up 70%, so now it's expensive, but it rose from 90 to 150. Just because it went up 70%, it was suddenly a strong sell. How can someone say on TV that just because a stock has gone up, it's expensive? Stupidity.

You have to look at the fundamentals. Meta wasn't expensive at 150 at all. But there are so many so-called experts checking price performance and percentages.

Arne: I'm just shocked that there are so many people in the media who really shouldn't be saying anything.

Speaker 1/Faruk: With the knowledge you have today, what would you tell 18-year-old Arne about stocks/investments if you had the chance?

Arne: Generally, I would say try to learn something new every single day and start with simple investment books, then move on to biographies to gain a broad understanding of what people think.

Start with easy-to-read investment books from people like Peter Lynch. This helps to grasp the concept behind why some stocks rise over time. It's better to start with these simpler books than to jump straight into advanced works like "The Intelligent Investor," as the content is too advanced for beginners, and they're not yet developed enough to absorb the material.

One of the great things social media has brought us is the ability to find mentors who are just right for learning from, not too advanced so that the wisdom doesn't go in one ear and out the other. Here, I think beginners have an advantage if they know how to utilize the communities and information available.

Be humble and avoid folly in the sense of buying something just because someone said it's good or you read something somewhere. If you choose to copy someone without enough thought, you'll likely sell at a bad time. That's just how it is.

Speaker 3/Kenneth: What do you do when doubt arises?

Arne: For me, doubt arises when the market is expensive and people are positive. When the market falls and people are pessimistic, I'm least doubtful because there's often such a large margin of safety on the underlying compared to what the stock trades for, so it's more about greed being difficult for me.

Then it's about going for a walk, checking what's priced in, and what's historical, and reading books and texts about long-term value creation. And using minimal time on macro and what I call noise.

Speaker 3/Kenneth: This has been fantastic. Thanks so much for coming to our podcast.

Speaker 1/Faruk: Thanks a lot, Arne. This has been a blast. I hope you join again at some point. Have a good one

Arne: Thanks for having me!