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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