In this week's article on how to be a better investor, I take inspiration from a point I made in a previous article.

How to choose an investment strategy!

It comes down to:

Investing goal

Risk tolerance

Knowledge level

Horizon

How much time you can spend on investing

Personality

Read the full article in the link below.

Two weeks ago, I wrote an article about what an investor should spend time on.

I highlighted that an investor should spend a big part of their time analyzing one’s process and improving it. But I didn’t talk about how you analyze and improve one’s process; the funny thing is you need a process to evaluate your investing process.

Read the rest here:

Diversification or Diworsefication?

In investing, many say that the only free lunch is diversification. This means reducing the specific company risk to come closer to the market risk. As an investor, your primary objective is to maximize

returns while minimizing risks.

We will today explore the concept of diversification and its potential to help you become a better investor. We'll also address the dangers of diversification and how to strike the right balance in your investment portfolio.

Read the rest of the article in the link below and remember to subscribe!

I got a great question during one dinner this weekend.

What question do you ask to understand if a investor know something or just is full of shit?

I said: If you own a company and the exchanges die in 10 years how do you earn returns on your investment.

I am not happy with my question.

What would you ask?

I am leaning towards, pitch me your best case.

I came across a thought-provoking tweet today by simple investing on Twitter, which got me contemplating where investors should focus their time. The tweet depicted the average investor dedicating approximately 90% of their time to monitoring stock prices while the remaining time is spent researching companies. In contrast, the "superior investor" allocates around 90% of their time to researching companies and only 10% to monitoring prices. This got me thinking about

an important aspect to add to the discussion.

As this newsletter is about becoming a better investor, I think it would be interesting to see what other investment professionals say makes a great investor. Michael Mauboussin wrote a paper in 2016 with Dan Callahan, CFA, and Darius Majd called “Thirty Years: Reflections on the Ten Attributes of Great Investors.” This topic of what attributes a great investor is very interesting because you can’t take yourself out of the equation. The investor is the one who makes the analysis and

takes the investment decisions. Even if you have a great investment strategy, it can be bad because you don’t have the right tools or personality to follow it and invest according to it.

When reading the paper, I can’t stop thinking about this section explaining the essence of this newsletter and how it benefits me and you.

“I had guest lectured for another one of our analysts, and agreed to teach Security Analysis in the summer of 1993. I have now taught that course for 24 years in a row (in 1995 I started teaching in the spring term). That experience has been a deep influence. When people ask me about what it is like to teach, I suggest they think about what it would be like to deliver 20 hours of lectures on what they do all day. At first you might think that is a pretty easy task, until you realize that articulating what you do forces you to think about what you do. As a natural consequence, you are likely to question whether there are better ways to do what you do. Teaching imposes a discipline of

understanding and communication that few other activities can—save perhaps writing. Inspirational teachers are also diligent students. So a commitment to teaching at a high level demands constant learning and consolidation of knowledge. There is the additional benefit of being

around young people who are bright and challenging.”

Mauboussin and his coauthor’s ten attributes of a great fundamental investor.

Accounting is like the language of business. If you want to truly grasp a company's value creation or destruction and its business model, you need to understand investing. Now, I'm not saying you have to become an accountant or auditor, but it's crucial to be able to adjust and analyze the three financial statements. Otherwise, spotting accounting red flags or uncovering fraud becomes a real challenge. Companies can easily mask problems in their income and balance statements, but it's

harder to hide things in the cash-flow statement (that's probably why it's usually at the end of the report).

Moreover, when it comes to valuation, what really matters is the present free cash flow. Earnings

can be manipulated to paint a picture that suits the management's agenda. Multiples may seem like convenient shortcuts, but they're essentially just a way to estimate discounted cash flows – which many investors find sufficient. On top of that, understanding accounting also helps you comprehend the business model better. Where does the company allocate its funds for products and marketing? How much do they spend on salaries? Do their operating expenses scale with their

growth? By diving into the financial statements, a savvy investor can gain valuable insights about a company.

So, remember, accounting knowledge gives you a leg up in understanding a company's financial

health, spotting potential issues, and grasping its overall business

model. It's like having a powerful tool in your investor's toolkit.

To become a successful investor, it's crucial to have a solid understanding of the companies you're investing in. This means delving into various aspects such as their strategy, positioning, vision, mission, and the competitive landscape they operate in. By gaining this understanding, you can assess the associated risks and determine whether the company has a competitive edge using frameworks like Porter's Five Forces Model (read more here Porter's Power Model).

Additionally, evaluating whether a company has a sustainable market share and profitability, often referred to as a "moat," is another key consideration. (read more here Moats) The strategy pursued by a company and its valuation are closely intertwined. That's why it's essential to comprehend the company's operations' intricacies to assess its valuation's fairness. By deeply understanding the company and its strategic direction, you can make more informed judgments about its financial worth.

Ultimately, connecting the dots between a company's strategy and its valuation empowers you as an investor to make well-informed decisions about potential investments. It allows you to evaluate a company's potential for success and determine whether its current valuation aligns with its underlying fundamentals.

Investing is a daily pursuit for investors, driven by their desire to achieve optimal returns on their capital. In equity investing and stock-picking, a key focus is comparing expectations to fundamentals. To a degree, investors in the market trade expectations with each other. A great investor can determine when a stock has too low or too high expectations in its share price.

As part of my investor journey, I'm immersed in "Expectations Investing" by Michael J. Mauboussin and Alfred Rappaport. I highly recommend this book to fellow investors who have already acquired some knowledge of the market and stock-picking. It delves into the concept of expectations investing, which may require a foundational understanding to grasp its nuances and implications fully.

It's important to emphasize a lesser-discussed aspect that aligns with the previous point. Thinking in probabilities can be challenging because we often prefer certainty and dislike leaving things to chance. However, the reality is that our world operates on probabilities, not absolutes. There is a chance that a startup will succeed in its endeavors, just as there is a probability that a massive trillion-dollar company will lose its once-unassailable market position. While both probabilities may below, they still exist. Great investors embrace and incorporate this perspective into their decision-making process, often called expected value (EV). They consider the likelihood of an event occurring

and its potential impact. Combined with the earlier point, it becomes a significant advantage for an investor. If they can accurately assess the odds in their favor and recognize when market expectations are overly pessimistic, they can position themselves for a highly profitable

future.

There is a saying, “Strong opinions, loosely held.” Which pinpoints this point very well. As an investor, you have a hypothesis about a stock, and you should always test it to see if it holds up against the best arguments. This is why short reports should be glad that someone has a different opinion. It challenges you, and if you see it is right, you probably should sell, not to lose money.

Maybe the hardest and one of the items that are probably hardest to train as your instinctive are working against you. When stocks go down and get cheaper (saying that nothing fundamental has changed), you should be happy because you can invest more capital for a higher expected return.

But we instinctively see this as a loss, either fighting or fleeing a loss. Fighting may constitute being aggressive on social media, and fleeing often sells the stock.

There are a lot of biases because investing is counterintuitive for us humans. Therefore, it is an uphill battle. But it can be won if you have a lot of insight into yourself and work on it methodologically every day.

We have a lot of noise in the market these days, we have more information than ever, and the signal (the valuable information) is hard to grasp. Today are many people and organizations to influence you to make decisions, maybe not direct investing decisions (but that happens also), which may not be in your favor. For example, a lot of analysis is commission-based, or investment banks talk positively about a company to be on a company’s good side if they want to raise money.

The sizing of different positions can be the difference between mediocre and great investors. A great investor knows when to bet more chips on the big swing! However, this is only if it is aligned with your pitch. If you are a thematic investor, you may have many more positions than a stock-picker that talks with the CEO of the companies he owns every quarter. The sizing needs to be a part of your investing strategy! Most important is to size so you can always come back and are

not knocked out!

READ! Studying and evolving, a great investor is never good enough! There is always something to improve on or understand better. Warren Buffett reads 500 pages per day. Maybe not your goal right away, but work your way up there.

I agree with all 10 of these. If I would add anything, would it be to turn on a lot of stones. To find great companies with great investment cases, you need to turn on a lot of stones. If this is one of the learnings from a study on 10 baggers, you can read more here: How to find 10-baggers.

Do you miss any attributes? Please tell me in the comments!

Happy hunting!

1) Be numerate (and understand accounting)

2) Understand value (the present value of free cash flow)

3) Properly assess strategy (or how a business makes money)

4) Compare effectively (expectations versus fundamentals)

5) Think probabilistically (there are few sure things)

6) Update your views effectively (beliefs are hypotheses to be tested, not treasures to be protected)

7) Beware of behavioral biases (minimizing constraints to good thinking)

8) Know the difference between information and influence

9) Position sizing (maximizing the payoff from edge)

10) Read (and keep an open mind)

If you are interested in articles like this you can read one more every week at

Warren Buffett came up with the economic moat concept in investing. Some say competitive advantage, unique selling point, or some other word that explains a company’s ability to protect its market share and

profits.

“The most important thing in evaluating businesses is figuring out how big the moat is around the business,”

Warren Buffett

This makes it important to understand the concept of "moats" is essential for investors seeking sustainable long-term growth. Just as a castle's moat protects it from invaders, a company's moat shields it from competitive threats. In this article, we will explore what moats are, why they matter, and delve into different types of moats according to Morningstar, authors of the book “Why Moats Matter.” I have previously written about Porter's Power Model - A Model to Find Moats which can help you recognize company moats.

In short, an aspect of the business that makes the company defend its market share and profits. In investing terms, it refers to a sustainable competitive advantage over its rivals. When assessing a company's long-term viability and growth prospects, it is essential for investors to understand the competitive advantage. An investor must also remember it is not only the direct competition the moat needs to protect the company but also against substitutions, new entrants to the market,

suppliers, and customers. All of these actors can hurt the market share or the profit margins in different ways. A robust moat enables a company to generate superior profits, defend its market share, and enjoy pricing power over its competitors.

Moats matter in three main ways:

Companies with strong moats tend to enjoy stable and consistent profitability, making them attractive investment options. A well-protected moat creates barriers for new entrants, reducing the risk of disruptive competition and preserving market dominance.

A company with a solid moat can deliver superior returns to its shareholders over the long run. Such businesses possess pricing power, enabling them to command higher margins and generate substantial cash flows, which can be reinvested or distributed to shareholders.

Moats act as a buffer against market volatility and economic downturns. By mitigating competitive pressures, companies with strong moats are better equipped to endure challenging times, making them more resilient investments.

So with a moat, will the revenue and profits be protected, and the company will create shareholder value over a long time with a reduced risk for the business. This is what a long-term investor a looking for, especially when focusing on quality companies.

Some companies possess intangible assets, such as patents, copyrights, trademarks, or strong brand recognition, which act as moats. These assets create high entry barriers for competitors, as they cannot replicate the company's brand image, customer loyalty, or unique intellectual property.

Companies that have a strong hold on their customers due to high switching costs enjoy a formidable moat. Examples include software companies with complex products or services requiring substantial time, effort, or financial resources to switch to competitors.

The network effects can be a powerful moat in industries like technology, social media, or online marketplaces; as more users join a network, its value increases, creating a virtuous cycle that reinforces the company's dominant position.

Companies with cost advantages, whether due to economies of scale, unique production processes, or access to scarce resources, can maintain a competitive edge over rivals. This moat makes it difficult for competitors to match the company's cost structure and thus erodes its profitability.

Companies that operate in industries where significant economies of scale can be achieved possess an efficient scale moat. These businesses enjoy cost advantages as they grow and expand, making it challenging for competitors to catch up.

To exemplify, let’s see some companies which have these moats.

Intangible assets are the oldest and most robust form of moats. One prime example is patents, which effectively block out competition. While there may be ways to circumvent them, patented intellectual property (IP) offers substantial protection. IPs can take the form of characters, molecules,

trademarks, designs, and more.

Take, for instance, the beloved character "Steam Boat Willie Mickey Mouse." This iconic creation has

enjoyed exclusive protection from global usage for decades, with its copyright slated to enter the public domain in 2024. Companies like Disney, Nintendo, Embracer, and others in the entertainment industry exemplify the power of intangible assets as moats.

Similarly, luxury companies such as LVMH showcase the strength of brands as intangible moats. Having developed their brand over a span of 100 years, competitors would require an equally lengthy period to catch up.

Software companies, particularly in the case of ERP systems like SAP, exemplify the significant impact of switching costs. Switching from one ERP system to another entails immense costs and challenges. Drawing from my experience as an accountant and controller, I can attest that no one desires to undergo the arduous process of changing an ERP system.

The complexities involved in relearning a new system, integrating various other systems, and updating files for analysis create a substantial deterrent, particularly within the finance department. While finance may be considered a support function, the ability to operate smoothly and efficiently is paramount for cost tracking and informed decision-making.

The potential benefits of a well-functioning ERP system are relatively

low, but the consequences of disruption or inefficiency are enormous.

Ebay and Hemnet serve as prime examples of how network effects drive the success of their business models. These platforms experience an increased value proposition for both users and merchants as the number of participants grows.

With more users joining the platform, the network effect amplifies, resulting in enhanced benefits and advantages. As the user base expands, the attractiveness of the platform increases, fostering a virtuous cycle that attracts even more users and merchants.

This, in turn, leads to a higher volume of transactions and a greater variety of goods and services available, ultimately creating a thriving ecosystem. The power of network effects lies in the ability to

create a mutually beneficial environment where the platform gains value from the growing number of participants while users and merchants benefit from the expanded reach and opportunities provided by a larger network.

Achieving cost-effectiveness serves as a powerful strategy to deter competition, as rivals find it difficult to match the price and struggle to attain profitability. Walmart and Costco exemplify this approach by leveraging their scale and purchasing power to offer competitive prices.

These retail giants capitalize on their size and ability to buy in bulk, enabling them to negotiate favorable pricing from suppliers. Consequently, they can pass on these cost savings to customers, offering lower prices than their competitors. This price advantage acts as a formidable barrier, making it challenging for rivals to match their affordability.

By maintaining a cost-effective approach, companies like Walmart and Costco solidify their market positions and enjoy sustained profitability. Their ability to deliver value through competitive pricing attracts customers. It keeps potential competitors at bay, as replicating their cost structure and achieving similar economies of scale becomes an uphill battle.

Evolution

Group enjoys notable efficient scale advantages, placing it in a formidable position. Competitors face substantial financial hurdles in establishing studios, particularly due to the requirements set by US regulations in certain states. These regulations mandate the presence of in-state studios for offering live casino games.

Evolution's scale empowers them to make significant investments in these studios. Their established infrastructure and resources allow them to meet regulatory demands, ensuring compliance and expanding their reach. In contrast, due to the associated costs, competitors find it challenging

to replicate these investments and establish their own studios.

The efficient scale advantage held by Evolution becomes a crucial moat, as it creates a barrier to entry for competitors in the live casino game market. Their ability to invest in and operate studios gives them a unique position, setting them apart from rivals who struggle to match their capabilities.

Moats are critical considerations for investors looking for long-term value and growth potential in the financial markets. Identifying companies with sustainable competitive advantages allows investors to make informed decisions, reduce risks, and potentially benefit from superior returns over time. According to Morningstar, investors can evaluate companies and build a well-diversified portfolio that incorporates businesses with robust defenses against the competition by understanding the different types of moats. Remember, investing in companies with

strong moats can provide a solid foundation for your financial success.

If you want to read more articles like this check out my substack in the link below!

This week’s article is inspired by what has happened in a Swedish darling stock Samhällsbyggnadsbolaget or, for short, SBB. I wrote an article two weeks ago about what is the traits of high-quality management, and I also mentioned some red flags coming from management. If you missed it, read it here: Traits of High Quality Management

Investing is a risky business. Many factors can influence an investment's outcome, including market conditions, industry trends, and management decisions. To mitigate risk, investors often look for signals

that the management team has "skin in the game." Skin in the game refers to the idea that executives and other insiders have a financial stake in the company, which incentivizes them to make decisions that

will benefit the company and its shareholders.

For those who may not be familiar with SBB, it's a real estate company that specializes in

community properties such as firefighter and police stations, schools, elderly homes, and more. The CEO and largest owner of the company have made bold promises about increasing dividends over the next century and positioning the company as a low-risk investment. With over 210,000 investors owning shares on Avanza, SBB has become a retail darling in Sweden. Many investors have placed their trust in the CEO's statements, and given his significant ownership stake, it's assumed that he's not talking nonsense. However, it's worth noting that he has a bond and therefore requires a consistent dividend to pay interest.

However, while the skin in the game can be a powerful motivator, it can also backfire. In this blog post, we will explore how having too much skin in the game can lead to poor decision-making and negative outcomes. I believe that this experience has valuable lessons to teach us. Based on this situation, I have identified five key takeaways.

Having skin in the game can be a good thing, but there is a point where too much commitment can become a liability. For example, an executive who has invested a significant portion of their personal wealth in a company may be reluctant to acknowledge negative information or make tough decisions that could harm the company's share price. This can lead to a lack of transparency and honesty, eroding investor trust and ultimately harming the company's long-term prospects.

Another potential issue with having too much skin in the game is that it can lead to over-leveraging. If an executive has invested a large portion of their personal wealth in a company, they may be tempted to use leverage to amplify their returns. While leverage can effectively boost returns in the short term, it can also increase the risk of catastrophic losses if the investment turns sour. This can lead to a "bet the company"

mentality that prioritizes short-term gains over long-term stability

Executives with a significant personal stake in a company may also be more likely to promise unrealistic returns or make overly aggressive growth projections. While this may help to boost investor confidence in the short term, it can also set the company up for failure if those projections do not materialize. In some cases, executives may even resort to accounting tricks or other forms of financial engineering to

make their projections appear more realistic. This can lead to legal and reputational risks down the road.

Executives with a significant personal stake in a company may also be more inclined to pursue empire-building strategies prioritizing growth over profitability. While this may be appealing to investors in the short term, it can lead to bloated costs, inefficient operations, and a lack of focus on core business objectives. This can ultimately harm the company's long-term prospects and erode shareholder value.

Finally, executives with too much skin in the game may be more likely to prioritize saving face over making tough decisions. If an investment is not performing as well as expected, an executive may be reluctant to cut their losses and move on. This can lead to a "throwing good money after bad" mentality that can harm the company's long-term prospects.

In conclusion, while having skin in the game can be a powerful motivator, it is important to recognize the potential downsides of having too much commitment. Executives who are overly invested in a company may be more prone to making poor decisions, pursuing risky strategies, and prioritizing short-term gains over long-term stability. An investor must carefully evaluate a company's management team and their personal incentives before making an investment decision.

What lessons have you gleaned from this experience or any other similar situation where a key individual had significant skin in the game?

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The investing platform is SaveLend simplifies the investor experience.

This a clear move to attract savers from savings accounts, which has

been a mantra for the company for quite some time with the slogan Money

Shouldn't Sleep.

Divided into three strategies.

Balanced (Balanserad)

Yield

Freedom (Frihet)

Reflecting the risk and goal an investor can have on the platform, from

the investor that wants low risk and lower returns to the one who wants

to do it completely by themselves.

I think this is a good move. It kinda creates a fund solution to invest

according to the investors' preferences, still allowing for the more

advanced investors to make their own decisions.

Well packaged and hopefully lowers the barrier for investors to invest

on the platform.

If you enjoyed this post.

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Investing is not just about crunching numbers or following the latest market trends. Successful investors know that the real value of a company is often hidden in the details, such as customer feedback, employee satisfaction, or even the buzz around a new product. This is where scuttlebutting comes in – a term used in investing to describe the art of gathering qualitative information about a company through informal channels. In this blog post, we will explore what scuttlebutting is, why it is time-consuming but essential, and how digital tools can make scuttlebutting more powerful than ever before.

What is Scuttlebutting?

Scuttlebutting is a term coined by legendary investor Philip Fisher in his book "Common Stocks and Uncommon Profits." Fisher believed that the best way to understand a company's true value was to go beyond the financial

statements and talk to people who had direct experiences with the company, such as customers, suppliers, competitors, or employees. By doing so, investors could gain valuable insights into the company's

operations, management, and competitive advantage that might not be reflected in the stock price.

Is Scuttlebutting Time-Consuming?

Scuttlebutting can be time-consuming because it involves a lot of legwork, patience, and detective work. It requires talking to people who may not be willing to share information, digging through online forums, social media, or industry reports, and piecing together a company's story puzzle.

Scuttlebutting also requires critical thinking and judgment to filter out the noise and focus on the relevant information. However, the rewards of scuttlebutting can be significant, as it can help investors discover

hidden gems or avoid costly mistakes.

How Can Digital Tools Empower Scuttlebutting?

Digital tools have revolutionized scuttlebutting by making it faster, more efficient, and more accessible than ever before. With the click of a button, investors can now access vast amounts of information about a company, its customers, and its competitors without leaving their desks. Here are some examples of digital tools that can empower scuttlebutting:

By using these digital tools and others like them, investors can scuttlebutt more efficiently and effectively than ever before. While scuttlebutting still requires critical thinking and judgment, digital tools can help investors gather and analyze qualitative information faster and more comprehensively than traditional methods.

In conclusion, scuttlebutting remains a valuable and essential tool for investors looking to gain an edge in the market. Investors can better understand a company's true value and potential by going beyond the financial statements and gathering qualitative information about a company. While scuttlebutting can be time-consuming, digital tools have made it more accessible and powerful than ever before. By using digital tools to scuttlebutt, investors can stay ahead of the curve and uncover hidden opportunities that others may miss.

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