Summer is just around the corner, and for many, reading is high on the priority list. There is a lot of talk nowadays about continuous learning and courses to acquire knowledge, but generally, I think books are undervalued as an information medium.

As Naval Ravikant so aptly put it:

“People look for recipes and tricks, but the truth is that the best thoughts are already hidden in old books. Reading upgrades the software in your head for free.”

I have read quite a few books over the past few years, but there are some that stand out and that I can truly, warmly recommend. Below is a list categorized by genre, featuring books I believe most people would benefit from reading.

Business, Investment, and Strategy

• Quality Investing - Lawrence Cunningham

• One Up on Wall Street - Peter Lynch

• The Psychology of Money - Morgan Housel

• Richer, Wiser, Happier - William Green

• Only The Best Will Do - Peter Seilern

• The Joys of Compounding - Gautam Baid

• Chip War - Chris Miller

• Same as Ever - Morgan Housel

• How to Make a Few Billion Dollars - Brad Jacobs

• Zero to One - Peter Thiel

• Extreme Ownership - Jocko Willink and Leif Babin

• The Education of a Value Investor - Guy Spier

• Never Split The Difference - Chris Voss

• The Warren Buffett Way - Robert G. Hagstrom

• The End of Competitive Advantage - Rita Gunther McGrath

• The Art of Thinking Clearly - Rolf Dobelli

• The Compounders - Oddbjørn Dybdad, Adnan Hadžiefendić, and Kjetil Nyland

Biographies

• Shoe Dog - Phil Knight

• Hold Fast - Samuel Massie

• Can’t Hurt Me - David Goggins

• Man’s Search For Meaning - Viktor E. Frankl

• Daring to Succeed - Guy Gendron

• Endurance - Alfred Lansing

• The Happiest Man On Earth - Eddie Jaku

Psychology and Philosophy

• The Almanack of Naval Ravikant - Eric Jorgenson

• Influence: The Psychology of Persuasion - Robert B. Cialdini

• The Obstacle is The Way - Ryan Holiday

• Pebbles of Perception: How a Few Good Choices Make All The Difference - Laurence Endersen

Fiction

• Project Hail Mary - Andy Weir

• Lonely Castle in the Mirror - Mizuki Tsujimura

• Red Rising - Pierce Brown

• Ender’s Game - Orson Scott Card

• The Green Mile - Stephen King

• Daisy Jones & The Six - Taylor Jenkins Reid

• The Spy and the Traitor - Ben Macintyre

• Ready Player One - Ernest Cline

• Red Notice - Bill Browder

• Animal Farm - George Orwell

What are some books you really found valuable/enjoyable? Please let me know. I’m always keen to add a new book to the reading library :)

So here it goes…

1. Getting rich without enjoying the journey: There’s no point in compounding money if you aren’t happy right now and money could help solve that problem. If having cash today can make you happier by helping you eat healthier, starting a good habit like going to the gym, feeling less alone by visiting family and friends more often, or strengthening a relationship by doing things together, then you should spend that money now and forget about compounding. Deferred gratification is a strong universal force, but don’t forget the present either.

2. The road ahead isn’t fixed: You can still reach the destination or main goal even though you take different routes than what you first envisioned/anticipated. If you’re a student reading this, take notice because it’s so easy to think that you must get into that school to become this occupation, but you know what, I’ve seen countless people ending up at the same place even though their backgrounds vary tremendously. The idea that you need to excel at an elite school for example, to join a solid company and that that is the only way is false. You can take a detour, you can travel, take a bachelor’s degree in something else, or change path and still end up at a place that fits you. Don’t obsess about the single route. Things are never as fixed as you think they are.

3. Don’t obsess about building a professional CV: It’s important to do things just for fun without sizing up a clear reward, value or objective. This is especially important if you’re a student and might feel that you need to constantly improve your CV by taking external roles in various student groups. Relax and do stuff just for fun too without seeing a clear benefit for your CV. It’s going to be worth it even though you cannot put a value on it right now.

4. Situational friends and about losing friends: Some friends fit a certain period of time or situation in life, and bringing them over to another point in your life might not work, and that’s okay. It’s normal to expect things to be the same in location B as in A, but the situation might be so different that the “friendship” doesn’t make sense anymore. This is going to be very evident if you have travel friends for a period in your life when you didn’t have any responsibilities, and there were actions and fun stuff going on every day. By bringing them back to normal life, there’s going to be a huge discrepancy in terms of how you deal with each other and the surroundings, and for some it will work, and for some it won’t, and that’s totally okay. Cherishing those moments and those friendships without expecting things to be the same many years later is fine.
   

5. Distance and friendship: Time is a factor when it comes to friendship, but more importantly, distance. When you are away from people, you will at times drift away, and that’s how it is. You cannot fight the distance power if you feel the relationship gets weaker. That’s just how it is.

6. Common sense is extremely rare: It’s not normal to find people who opt for simplicity, for what actually works in practice and not just theory, or those who simply say “I don’t know”. For some reason, media, newspapers, lectures, and pretty much everything you see in daily life is bent towards complexity, and if you can find sources, mentors or friends who simply show common sense you’re in a very good place because they will cut to the chase and ask the uncomfortable questions or give the statements that need to be heard but no one wants to say it.
   

7. Take care of the fundamentals first: Whenever you have a problem or feel sad, make sure to reflect upon if fundamentals such as sleep or food are covered. More often than not, that’s the main cause. Give it a day or two and the problem might be gone or at least, a lot easier to deal with, if you take care of the fundamentals.

8. Imposter syndrome is a tax on growth: Imposter syndrome is a tax on personal growth. It’s not a bad thing, and it’s extremely common both among peers and those under and above you.

9. Focus on progress, not the end goal: You must measure your progress and forget about the final goal. Tracking specific areas is the best way to improve something significant: “You can’t improve what you don’t measure.” Point being, first you must look at the input, the system, and evaluate if you’re doing things right. There is no point talking about grades, about fitness, about relationships etc., if you don’t do the actions needed to accomplish the desired end-state. Is the fridge full of healthy food like Greek yogurt, eggs, vegetables, overnight oats etc., or is it mainly processed food with little nutrition? Have you shown care for another person and not thought of yourself first, and have you done the work in terms of studying to actually understand things, or are you focused on quickly solving the exam questions by looking at the answers first and faking a backtest where you already know the correct route? Point being, if you don’t focus on the input, the process, and always evaluate that, then you won’t get the output you want, and you’ll just end up chasing a ghost.

10. Life is made of ordinary moments: We spend so much time chasing big milestones that we forget life is mostly made up of these tiny, ordinary moments. Enjoying the small moments can be as easy as bringing a cup of coffee, sitting down, and actually trying to smell the aroma and feel the warmth. Point being, don’t just do things quickly to get to the next task. Try to remember that life will be better if you stay more present and not always think ahead, forgetting to treasure good food, clean air, a good breeze, cold water, tasty coffee, and a hot shower.

I’d very much like to read what took you a long time to learn, too!

Best,

Arne Ulland

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There is a question every investor eventually has to answer honestly: when one of your holdings falls sharply, how do you know whether to buy more, hold steady, or accept that you were wrong?

In practice, this is one of the hardest things in investing. I am convinced that most money is lost at precisely this moment, not from bad initial analysis, but from a confused response to falling prices and shifting narratives.

In the transcript below (adapted from my recent guest appearance on the StockUp podcast), we cover:

• The 3 Categories of Falling Markets: How to distinguish between market panic and a broken thesis.

• Constellation Software: Why it is now 60% of my portfolio (up from 13% in 2024).

• Novo Nordisk: Why the math suggests you are currently getting the obesity segment for “free.”

• Mistakes: My own errors in anchoring and overconfidence.

I hope you enjoy this episode as much as I did.

Note: This interview has been structured and translated from Norwegian using AI to enhance readability.

Part I — Is the Market Expensive?

Kenneth/Faruk (podcast host) - Markets have been under pressure lately. When you look at things broadly today, does it look expensive to you, or are there real opportunities out there?

Arne - I think it’s a mixed picture. Certain sectors and certain factors, quality in particular, have genuinely been punished. But at an index level, especially the US market, things look stretched. And I don’t think that’s just a feeling.

Francis Rochon of Giverny Capital laid it out very clearly in his most recent annual letter. The top ten positions in the S&P 500 now make up 41 % of the entire index’s market value. The remaining 490 companies are just 59 %. That level of concentration is unusual, and what makes it more concerning is what you’re paying for it.

Every segment is above its historical average. But the premium at the top is what concerns me most, because those same companies are investing extraordinary amounts of capital expenditure just to sustain their current growth trajectory. When capex surges, the denominator in your return on invested capital calculation grows. ROIC falls. And when ROIC falls, free cash flow per share falls with it. It’s hard to see how you compound at 15 % per year when you’re reinvesting so heavily just to hold your position.

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Kenneth/Faruk (podcast host) - So the index looks expensive, but is that just a multiple expansion problem, or do you think the earnings forecasts themselves are too optimistic?

Arne - Both, honestly. There’s a multiple expansion element; the market has re-rated these businesses significantly over the last few years. But there’s also an earnings quality question. The market is pricing in a very specific and optimistic future: that AI investment translates into dramatically higher productivity and margins within a reasonably short timeframe. That may happen. But the capex cycle we’re in suggests it won’t come cheaply or quickly. And the investors pricing in 15 % compounding from here are making a strong bet on that outcome.

Part II — Bias vs. Conviction: A Framework for Falling Markets

Kenneth/Faruk (podcast host) - I want to get into something that I think is the core of how you operate, this idea of distinguishing genuine conviction from cognitive bias when something in your portfolio is falling. How do you actually think about that in practice?

Arne - The problem with talking about bias in the abstract is that naming a bias doesn’t help you in the moment. Knowing what confirmation bias is doesn’t make you immune to it when one of your positions is down 30 % and the headlines are screaming. What helps is having a pre-built structure for diagnosing why something is falling, because the right response is completely different depending on the answer.

I operate with three categories. They’re distinct enough that I think each one requires a genuinely different analytical posture.

Kenneth/Faruk (podcast host) - Walk me through them.

Arne - Category one is the easiest, at least conceptually: the entire market falls. When everything goes down indiscriminately, I have a strong prior that short-term prices are not accurately reflecting fundamental value. The mechanism is herd behaviour, and it’s worth being precise about what that means. Herd behaviour is not stupidity. It’s acting differently from how you would if you were making the same decision in a calm, private setting. We’re evolutionarily wired for it. If a predator appeared near your ancestors, careful individual analysis was a liability. The right move was to run with everyone else immediately.

Financial markets trigger that same instinct. Prices fall, fear spreads, people sell first and ask questions later. We saw it during COVID, Netflix was sold off alongside restaurants and airlines, at the exact moment that every government on earth had just told its population to stay home and watch television. The single company most structurally advantaged by a global lockdown was trading down with the rest. Would anyone, asked in a quiet room with no ticker, have said Netflix should be cheap during a lockdown? Of course not. But that’s herd behaviour, you abandon the quiet-room logic.

“When prices fall, risk falls. When prices rise, risk rises. Most investors have this exactly backwards, and it costs them enormously over a lifetime.”

Kenneth/Faruk (podcast host) - And practically speaking, how do you make sure you’re actually buying when things are darkest, rather than just believing intellectually that you should?

Arne - Part of it is conditioning the reflex in advance, not trying to override it in the moment. I pay attention to herd behaviour in everyday life, the moment someone crosses the road against the light and five people follow without thinking. You see it constantly, once you start looking for it. Building that awareness in low-stakes situations helps you recognise it in high-stakes ones.

But the structural answer is: you need a prior valuation framework that tells you whether something is cheap on an absolute basis before anything starts moving. If the S&P corrects 10 % and it’s still trading at 22x forward earnings against a historical average of 17x, that’s not a buying opportunity, it’s still expensive. The market has to be both falling and genuinely cheap for my interest to turn.

Kenneth/Faruk (podcast host) - What about category two — a whole sector falls?

Arne - That’s where it gets genuinely difficult. The herd behaviour explanation is only partially right. There’s often a real underlying driver, a technology shift, a regulatory change, a structural repricing of the economics, and separating the signal from the noise requires real expertise. You can’t hand-wave it away as just panic selling.

The current software sell-off is the live case study. Everything is down 40–60 % from the highs. The narrative is that AI commoditises software development and destroys pricing power. That narrative contains real truth, which is exactly what makes it dangerous, it’s seductive. The two specific traps to watch for here are control bias, where you believe you understand the competitive dynamics better than you actually do, and overconfidence, where you build a thesis without genuinely stress-testing the other side.

The distinction I keep coming back to is between horizontal and vertical software. Horizontal products, anything sold regardless of what industry the customer is in, like Zoom or DocuSign, face real structural pricing pressure. The switching cost is low, and modern AI tools can replicate the core product in weeks. That’s a real threat. Vertical, mission-critical software is a completely different story. The software that runs a prison’s security system, a specialist law firm’s case management, a manufacturer’s production scheduling, replacing that is not a cost decision. It’s a risk decision. The question is never ‘can we save 20 % on the licence?’ It’s ‘what happens to our operations if the migration goes wrong?’ That calculus does not change because an AI startup has built a technically impressive product.

Kenneth/Faruk (podcast host) - And the third category — a single stock falling while everything else is fine. That’s the hardest one, isn’t it?

Arne - By some distance. When the market is flat or rising but one of your holdings is in freefall, every cognitive bias you possess activates at once, and they all push you in the same direction: hold, or buy more.

Confirmation bias is the worst. Buffett’s observation is exactly right, the human mind is extraordinarily good at filtering new information to reinforce existing beliefs. You’ve spent months building a thesis. Every piece of new information gets evaluated through the lens of that thesis. A genuinely negative data point gets rationalised as temporary. A competitor’s advance gets dismissed as overstated. You’re not lying to yourself deliberately. The filtering happens below the level of conscious thought.

Sunk cost fallacy piles on. The more time you’ve invested in understanding a business, the more painful it is to conclude you were wrong. And then there’s story bias — negative narratives about a business only seem to emerge in analyst notes and financial media after the stock has already fallen substantially. The concerns were always there. The margin pressure was visible in the numbers. The competitive threat was present. But as long as the price was rising, nobody wanted to tell that story.

“You should have been most sceptical when the stock was at its highest. That’s when the embedded assumptions were most fragile. The scepticism that arrives after the fall is usually correct, but it arrives too late to protect you.”

Kenneth/Faruk (podcast host) - So what’s the practical remedy for that situation? How do you build a defence against it before it happens?

Arne - Two things, and both have to happen before you own the position, not after it starts falling.

The first is the pre-mortem, a technique I learned from Francis Rochon. Before entering any position, I fast-forward five years and write a detailed account of how the investment went terribly wrong. Not a list of risks, a narrative. What happened? What did I miss? What was the sequence of events that destroyed the thesis? That forces genuine engagement with downside scenarios and makes them concrete. And it creates a written record I can check against reality as the story evolves. When the bad things I imagined start actually happening, I have a pre-built framework for recognising them, rather than rationalising them away.

The second is defining exit conditions in advance. It’s easy to say you’ll sell if the thesis breaks. It’s much harder to define, clearly and specifically, what ‘the thesis breaks’ actually means for a given business. Do it before you own the stock, when you’re calm and objective. The specific triggers, the specific data points, the specific competitive events that would cause me to sell, I write those down. Because trying to define them while you’re watching the price fall is not analysis. It’s rationalisation.

Part III — The Arithmetic of Quality

Kenneth/Faruk (podcast host) - Let’s talk about valuation discipline. You’re known for being comfortable holding high-multiple stocks, Constellation has never been cheap by traditional measures. How do you square that with being disciplined about what you pay?

Arne - The key insight is that an appropriate multiple is not a fixed number. It’s a function of two variables: the return a business earns on the capital it deploys, and the rate at which it grows. Once you internalise that relationship, a lot of things that look expensive on the surface start to look fair, and a lot of things that look cheap start to look like value traps.

Take a business earning 25 % return on invested capital, growing at 10 % per year. Every unit of capital it reinvests earns 25 cents. That’s an extraordinarily productive use of retained earnings. The present value of that cash flow stream implies a fair P/E of roughly 25–30x. Paying 28x for that business is not expensive, it’s roughly correct.

Now take a business earning 12 % on capital, growing at 5 %. Its reinvestment is far less productive. The fair multiple is maybe 12–15x. Paying 20x for that business, even though the absolute number looks lower, is actually more expensive in any meaningful sense. The headline multiple is almost meaningless without the underlying context.

Kenneth/Faruk (podcast host) - So what are the specific signals you watch to tell you whether a premium multiple is still justified?

Arne - Two things above all else. First, the direction of margins. If gross margin is eroding quarter over quarter, something structural is happening, pricing power is weakening, competition is intensifying, costs are rising in ways the business can’t pass on. A falling margin today is a falling multiple tomorrow. Conversely, a business with expanding margins deserves a rising multiple, because the fundamental value per share is growing faster than the headline earnings number suggests.

Second, the stability of ROIC over time. A business that has earned 20 %+ ROIC for a decade and has the structural characteristics to maintain it, a dominant position, low capital intensity, strong customer retention, deserves a premium to a business that has earned 20 % ROIC for two years in a more competitive environment. History of capital efficiency matters enormously.

Part IV — Novo Nordisk: What the Price Actually Implies

Kenneth/Faruk (podcast host) - You’ve been very open about your Novo position. It’s about 20 % of your portfolio and the stock has fallen roughly 74 % from peak. Walk me through your current thinking.

Arne - I’ll start with the self-criticism, because I think it matters. I began building the position around DKK 550-500. That was a mistake in process, not just outcome. At 500, the price still embedded very demanding assumptions about the obesity franchise, assumptions that required near-flawless execution on several fronts simultaneously. I didn’t apply the rigour I should have. I underestimated how slow and unpredictable regulatory and political forces are in US healthcare, and I underestimated how long the compounder issue would persist. Those errors are mine.

Kenneth/Faruk (podcast host) - But you’re still holding. What’s the case from here?

Arne - At approximately DKK 235, the analytical picture is genuinely different. Let me walk through it numerically.

The diabetes segment generated roughly DKK 200 billion in revenue in 2025. The EBIT margin on that segment is approximately 42 %, implying around DKK 90 billion in EBIT. Applying an EV/EBIT multiple of 8–12x, which I consider appropriate for a high-quality pharmaceutical franchise, gives a diabetes segment value of DKK 150–230 per share.

The current share price is about DKK 235. Which means, roughly speaking, you’re paying fair value for the diabetes business and getting the entire GLP-1 obesity franchise for free. The market has valued it at essentially zero.

Kenneth/Faruk (podcast host) - Is zero actually wrong, though? The competitive pressure from Eli Lilly, the pricing issues, the Redefine-4 trial result, is the market maybe just catching up to reality?

Arne - Some of it, yes. The peak-of-1000 price was pricing in a perfect scenario , perfect execution, no meaningful competition, no regulatory headwinds. That was wrong, and the market was right to reprice. But there’s a difference between the market correctly removing an unjustified premium and the market valuing a large, growing, structurally durable franchise at zero. Those are very different things.

The diabetes market has never contracted in modern history. It grows at around 6 % per year. There are hundreds of millions of people globally who need insulin and related treatments and don’t yet have reliable access. Novo has operated in this space since 1923. That doesn’t disappear because of a two-percentage-point difference in a single head-to-head trial.

My honest view on the Redefine-4 result: it was a bad day for the narrative, but it wasn’t a structurally significant finding. It was a non-blinded study, the patients knew what they were taking, which almost certainly introduced bias. The Redefine-11 study in 2027 will be blinded, longer duration, and I think it will tell a more nuanced story. Whether it swings the competitive picture meaningfully back toward Novo, I genuinely don’t know. But the current price doesn’t require it to.

Kenneth/Faruk (podcast host) - What would make you sell?

Arne - I defined this in advance. If by mid-2027 the story is still: flat or declining earnings, the oral GLP-1 isn’t gaining durable share, and the competitive landscape has shifted toward a clear winner-take-all outcome in favour of Lilly, then the thesis is broken and I’ll sell. My horizon here is specifically through 2027.

What I’m not selling on is a difficult 2026. 2026 will almost certainly show flat or negative EPS growth. The most-favoured-nation pricing policy has cut prices, and it takes time for volume to compensate. That’s a twelve-month phenomenon. I’m not invested in the next twelve months.

“You can’t price a pharmaceutical business on two years of earnings. You price it on the cash it generates over the next fifteen. At DKK 235, the fifteen-year picture for insulin plus obesity looks very different from what the current price implies.”

Part V — Constellation Software: The Compounder’s Compounder

Kenneth/Faruk (podcast host) - Sixty percent of your portfolio is in one stock. That’s a very concentrated bet. Help me understand the conviction behind it.

Arne - The conviction comes from a combination of business quality and what I see as a genuine misunderstanding of the AI risk narrative. Let me take them in turn.

Constellation is, at its core, a capital allocation machine. Mark Leonard built it on a simple but extraordinarily well-executed idea: acquire vertical market software businesses at disciplined prices, historically 5–8x EBITA, operate them with a decentralised structure that preserves their local knowledge and customer relationships, reinvest the cash into further acquisitions at the same hurdle rate, and repeat. The hurdle has been 20 %+ return on invested capital. The portfolio has grown from a handful of businesses to over a thousand. Free cash flow per share has grown over 100 % in the same period the stock price has been flat. One of those numbers is right and the other one is wrong.

Kenneth/Faruk (podcast host) - The obvious pushback is what you touched on earlier, AI disrupts this kind of legacy software. You’ve already addressed it somewhat, but make the full case for why Constellation specifically is more protected than people think.

Arne - The bear case rests on a misidentification of what Constellation’s moat actually is. Most people look at the software, which, yes, often looks like it was built in the 1990s, and conclude that AI can replicate it easily. That’s probably true. The moat was never the software’s technical sophistication. The moat is: who owns the relationship, who carries the liability, and who can you call when something goes wrong?

If you’re running a correctional facility and your door-lock scheduling software fails, you don’t get a chance to switch to the startup with the better AI product. You need someone on the phone who has worked with your system for fifteen years, knows your edge cases, and can fix it now. Constellation’s portfolio companies have those relationships. A new entrant, however technically impressive, starts from zero on all of them.

The SPGI example makes the same point from a different angle. When Anthropic announced it was entering the credit market, S&P Global fell 12 %, on the apparent logic that AI would displace credit ratings. Within days it recovered, because thoughtful investors realised that 85 % of SPGI’s revenue is credit ratings, and that the first thing every financial AI tool asks is whether you want to connect to S&P Global’s data. AI doesn’t displace that relationship. It deepens it.

“Crap in, crap out. AI is only as good as the data it runs on. The businesses that own irreplaceable data or irreplaceable relationships are not threatened by AI. They are made more valuable by it.”

Kenneth/Faruk (podcast host) - Mark Leonard’s absence is the one thing that makes me nervous about Constellation. How do you think about that risk?

Arne - It’s a legitimate concern and I hold it. What I watch is the capital allocation discipline, the hurdle rate, the acquisition prices paid, the culture of returns obsession that Leonard built. Mark Miller, the new CEO, was literally the owner of the first business Leonard ever acquired,over twenty years ago. The institutional alignment is as deep as it gets. But founder transitions at exceptional companies always carry uncertainty, and I would be dishonest if I said it didn’t factor into my risk assessment.

What I find genuinely exciting under Miller is the strategic evolution. Constellation has started acquiring publicly listed companies, Sabra being the recent example, as a complement to private VMS acquisitions. And the spin-out mechanism remains intact: the six operating groups can each be listed separately, at premium multiples to where they trade within the consolidated entity. Topicus demonstrated that. The embedded optionality in that structure is substantial and not fully reflected in today’s price.

Kenneth/Faruk (podcast host) - Walk me through how you’re valuing it.

Arne - Roughly: Constellation generates around 20 % ROIC, reinvests approximately 80 % of capital, and has historically grown free cash flow per share at 15 %+. Applying a 22x multiple to that stream, which I think is conservative/decent for a business with this track record and this capital allocation culture, gives me roughly 40–50 % upside from current levels. And that’s before any acceleration in organic growth that AI efficiency improvements within the portfolio might contribute over time.

Part VI — The Paradox of Choice: Cutting the Watchlist

Kenneth/Faruk (podcast host) - I want to touch on something practical that I know you’ve been thinking about — portfolio management and watchlist construction. There’s a real tension between having enough options to find value and having too many to actually analyse properly.

Arne - I had to learn this the hard way. For most of my investing life I maintained a watchlist of around 200 companies, organised into priority tiers. The theory was: market falls, go straight to Priority 1. In April 2025, when the market actually corrected, I discovered that theory and practice were very different things. I was paralysed. Too many names, too many different valuation frameworks, too many variables competing for attention simultaneously.

The psychology literature calls this the Paradox of Choice. The famous jam experiment in consumer psychology , a display of 24 varieties produced less purchasing behaviour than a display of 4–6, isn’t just an interesting result. It describes something real about how human cognition handles large choice sets. We freeze. Or worse, we simplify in the wrong ways, sorting by P/E, filtering by sector, and arrive at worse decisions dressed up in false comprehensiveness.

Kenneth/Faruk (podcast host) - So what’s the right number?

Arne - I’ve moved to somewhere between 30 and 50 companies that I know deeply, where I’ve read the annual reports carefully, built my own view on the competitive dynamics, and have a clear sense of what I’d pay at various price points. Not the 200 I was tracking superficially. Most serious professional investors maintain around 120 names. For a private investor with a full-time career, I’d argue considerably fewer is actually better, perhaps 20–40.

The counter-argument is that a smaller watchlist means missing opportunities. That’s real but overstated. Your edge doesn’t come from seeing more opportunities. It comes from understanding fewer of them well enough to act with confidence when they appear. The Peter Lynch line about turning over rocks is right, but the version that works in practice is turning over fewer rocks and looking much more carefully at each one.

Part VII — AI and the Software Sector

Kenneth/Faruk (podcast host) - Software has been absolutely crushed. ServiceNow, Salesforce, Veeva, Adobe — down 40–60 % from highs. At what point does that become interesting, and how do you think about who survives?

Arne - The single biggest structural vulnerability is seat-based pricing. As AI agents begin performing tasks that previously required human employees, the number of seats needed falls. The price per seat also falls because competitors are building AI-native alternatives simultaneously. It’s a double compression on the revenue line, and for companies whose entire model is per-user licensing of a single-function product, the risk is real and structural.

But platform businesses with deep ecosystem integration are in a completely different position. A large enterprise that’s been running HR, finance, and supply chain on one integrated platform for fifteen years, their data is there, their workflows are customised, their staff know the system. When the platform adds AI capabilities, does the customer’s negotiating position improve marginally? Yes. Does the switching cost change materially? No. The rational move for the platform vendor is to reframe pricing away from per-seat licenses toward value-based pricing on the AI capabilities delivered. For those companies, this is not a threat. It’s the opportunity of a decade.

Kenneth/Faruk (podcast host) - Who fits that description in your view?

Arne - The companies I find most interesting have three characteristics simultaneously: mission-critical workflows where switching is effectively impossible, proprietary data that improves AI model quality, and the operational scale to invest in AI without compromising profitability. That’s a short list. Most software companies have one or two of those. Very few have all three. Constellation’s VMS portfolio qualifies on the first criterion definitively. That’s a meaningful structural advantage in a sector where a lot of the sell-off has been indiscriminate.

Part VIII — Investment Philosophy and Honest Mistakes

Kenneth/Faruk (podcast host) - Let’s get into the nuts and bolts of how you select companies and what you’re targeting in terms of returns.

Arne - The return target first: when I buy a stock, I need a clear path to at least 12 % annualised returns, and I prefer 15 %. If a business is only likely to deliver 6–10 % for me, I should buy an index fund. The only rational reason to run a concentrated portfolio of individual stocks is if your analysis generates returns that meaningfully exceed the passive alternative. Below 12 %, that case is weak.

On stock selection: ROIC is the foundation. I want businesses earning significantly above their cost of capital, in practice, above 15 % at minimum, with a preference for 20 %+. For serial acquirers specifically, I look at ROIC both including and excluding goodwill. The two numbers tell different stories. ROIC excluding goodwill shows the underlying economics of the acquired businesses. ROIC including goodwill shows whether the acquisition prices have been disciplined. Both need to be healthy for the model to create value.

Free cash flow generation is non-negotiable. Margin trajectory matters as much as margin level. And capital intensity shapes everything else — the best businesses I’ve found generate extraordinary returns precisely because they require very little ongoing capital to sustain and grow.

Kenneth/Faruk (podcast host) - You’re very process-oriented, but you’ve also made mistakes. I want to ask directly, what have your biggest errors actually been, and what did you learn from them?

Arne - I admire how Francis Rochon handles this in his annual letters. He awards medals, Gold, Silver, Bronze, to his three biggest mistakes of the past five years. He documents them as carefully as his successes. I’ve tried to adopt that discipline.

My Constellation mistake was anchoring. I’d held the stock for nearly seven years and had made a personal rule never to sell, reasoning that quality compounders punish the investor who exits, because you can never buy back at the same price. That logic is right about the long-term business. It was wrong as an investment rule. By early 2024, Constellation was trading at roughly two years forward fundamental value. The rational move would have been to trim from 13 % to maybe 10 % of portfolio, a small action that would have captured some of the excessive premium while maintaining the core position. I didn’t do it. The ‘never sell’ rule prevented a clearly rational decision. That’s anchoring bias in its purest form.

My Novo mistake was overconfidence in the limits of my own expertise. I understood the product well. I understood the market dynamics reasonably well. What I didn’t adequately weight was how slow and unpredictable regulatory and political forces are in US healthcare, a domain where I am not an expert and where I should have carried far more uncertainty. I’m not a pharmacologist, a healthcare economist, or a policy analyst. I should have reflected that in my position sizing and my entry price. I didn’t.

Kenneth/Faruk (podcast host) - Last question: the investors you learn most from.

Arne - Buffett for the intellectual foundations, capital allocation discipline, thinking about stocks as partial ownership of businesses, the patience to wait for the right pitch. His letters from the 1970s and 1980s are worth reading repeatedly.

Peter Lynch for the accessible, grounded wisdom. He operated with a more balanced life than Buffett and a philosophy built on observable reality rather than complex models. His line about turning over rocks is right, but the deeper point is that the best investment information often comes from living attentively in the world.

And Francis Rochon of Giverny Capital, perhaps the one I return to most frequently. He has run the same disciplined quality strategy since 1993. His annual letters are the most intellectually honest I’ve read. He’s used the same homely Excel formatting for thirty years and hasn’t changed what doesn’t need changing. That, to me, is the whole philosophy in miniature: do what works, document your mistakes, don’t overcomplicate it, and let the compounding do the rest.

“Truth lives in the numbers. Follow the fundamentals, ignore the narrative, and trust the process — especially when the process is hardest to trust.”

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I’m curious, when your high-conviction holdings fall 30%+, what is the one metric or signal that tells you to buy more versus admitting a mistake? Let me know in the comments.

Best,

Arne Ulland

“If you’re going to be in this game for the long pull, which is the way to do it, you better be able to handle a 50% decline without fussing too much about it.” — Charlie Munger

Note what he said at the end of the quote: “…without fussing too much about it.”

Many quality compounders are being crushed lately due to various narratives. What is noticeable is how quickly sentiment changes, even among rational investors.

Negative thoughts suddenly start to pile up without much second-guessing.

Take two of my investments: Constellation Software and Novo Nordisk.

The former is following a massive selloff in software. If one has learned anything during the sell-offs of the last decades, it is that investors tend to sell first and ask questions later.

Who in their right mind sold Netflix during COVID, while we experienced a lockdown which surely meant more subscribers? Who massively sold the mall and hotel stocks that dominate major areas in large cities just because there was a temporary forced shutdown? Did they think that it would last years and years? Did they believe people would never be allowed to travel again, or never allowed to shop unless it was online?

No, I don’t think they thought at all. They reacted first, just like our primary mind has done for centuries and thousands of years when we see a lion.

We run, then ask questions later, because we cannot afford to question while we see the threat.

That is how I see the software selloff. Too few who talk about AI understand how it is built. These Large Language Models are primarily millions of math equations stacked one after another. The LLM is trying its best, using probability, to see patterns in historical data and solve for the most reasonable parameters. Meaning, they use probability to find the next right word, which naturally means it’s seldom 100% right.

The worst problem is ofc if the data being looked at is even relevant to the question you’re asking or trying to solve.

Take Amazon back in 2017 - They tried to use AI to create a recruitment tool, and they trained it with their employee data. Then, when the AI received an application from a woman, it thought for a while and then rejected the applicant. At first glance, that could be okay if there was a better candidate, but the issue was that it was trained to prefer male candidates because it was trained on 10 years of resumes submitted to Amazon, which were predominantly from men. Hence, the right and most logical next step (the right answer in the math equation) was that a man should be hired. So much for being intelligent and context-aware…

My point is that AI is undoubtedly incredibly useful …but you have to spend some time thinking about the risk aspect of that probability. Consider what that means for a company whose primary function is to always be right, even at the cost of an ugly UX. That’s the case for many VMS. Can you afford the 0,5% chance of opening the prison doors with new software, which is 80% cheaper than the previous one?

Now, both CSU and NVO are down a lot lately. How should I feel about the current decline? Should I sell, hold, or buy more? Should I get scared, stressed, panicked, or greedy?

It’s not fun, that’s for sure, and I made a massive mistake being concentrated in these two firms. However, done is done. Here’s how I plan to proceed:

For $CSU, I am waiting for the fundamentals to show the narrative. Otherwise, I am just a sheep following the crowd and getting carried away by the volatility. Also have a feeling that the current software sell-down actually could be positive for CSU and other acquirers as they might allocate more capital, which for many has been the major issue with CSU lately - Can they allocate enough capital to keep FCF growing meaningfully? Valid question, but a bad software market with cheaper valuations is probably good for us shareholders.

For , I will wait until 2027 before I act. That is when we will start to understand if the volume game of the Wegovy pill actually works and can offset the price decline.

The recent news about CagriSema was not positive, but in the end, the thesis is about volume. I want to see if they can grow the volume of the oral semaglutide 25 mg at a solid pace, even if LLY has better products. We do not know if the story turns out badly yet because we haven’t seen the full launch and scale of Wegovy or LLY’s product. Currently, I view it in the sense that selling NVO now at its current valuation is selling before the story and thesis have actually materialized and developed according to plan.

In total, I will wait. I will accept bad quarterly or, at worst, even yearly performance, while the market is unsure.

Anchoring bias? Sunk Cost fallacy? Something I will continue to ponder about, but currently, my goal is to accept the volatility and not fuss too much about it. At least I got to understand how bad the recent news really is instead of looking at the price and concluding thereafter.

What about you? How do you proceed when the firms you own crash and narratives dominate the newsflow?

Summary of the Thesis

Introduction

Whenever I conduct stock research, I start with something I call “The Gatekeeper.” It includes three main questions: (1) Is ROIC stably above 15%?, (2) Is FCF conversion above 80%? and (3) Do I understand how they make money?

If ‘no’ to any of these, archive the company and move on. As we got 3 “Yes”, we can continue.

The purpose of the gatekeeper is to have a process that lets me quickly determine if the stock is a typical firm I understand. Or if I’m about to fool myself and it’s outside of my circle of competence, and I really shouldn’t spend any time on it, despite how attractive it might appear. While there are times I might proceed even if the gate is “closed”, such as a compelling turnaround case where fundamentals are about to change, those instances are rare.

Let’s now see if Novo Nordisk passed the test and deserved to be analyzed further, or if it’s simply too complex and we shouldn’t spend any time on it

Is ROIC stably above 15%?

ROIC has historically been between 50 - 80%. That said, ROIC is somewhat misleading for pharmaceutical companies as the R&D costs themselves are not well-reflected in such a calculation, nor the capex spending; there are massive upfront investments that enable the large earnings once products are sold. This means one must look at it holistically and constantly understand that R&D + Capex are part of the picture.

Is FCF conversion above 80%?

Yes, the trend has generally been between 80 to 100% from 2015 to 2025. In general, companies that manage to convert around 80-100% of their free cash flow into cash are very efficient in their operations, as it means much of the earnings “fall through” the company’s P&L and enable smart investments. The more, the better.

Capital expenditures have gone from 6,335 million DKK in 2021 to 25,806 million DKK in 2023, 47,164 million DKK in 2024, and approximately 42,711 million DKK in 2025 (as a result of factory expansions and acquisitions). This capex increase has affected the FCF conversion, but normalized, it lies above 80%.

Do I understand how they make money?

Novo Nordisk generates revenue by inventing and selling primarily diabetes medications (1), as well as other medicines such as weight-loss drugs (2). They obtain patents on these for extended periods, allowing them to sell the medicine at a high price to users who require it for medical reasons.

1# Insulin is a protein in the body that most people are born with and produce in the pancreas. When humans eat food, insulin is released, and sugar or glucose is then transported by the insulin into cells (fat, muscles, or liver).

The point of this transport is for it to be used later as energy.

Some people either produce no insulin (Type 1 - congenital) or they don’t produce enough (Type 2 - lifestyle) and need supplements of insulin in their bodies.

Traditionally, the company has sold insulin products (needles) to the world and has held a leading position.

2# Obesity Medicine: Recently, they have moved into obesity medicine (gut-like hormones called GLP-1 for glucagon-like peptide analogs), which suppresses appetite or blocks fat absorption. Obesity sales as a share of total sales have gone from being approximately 3.6% of revenue in 2021 to 16.4% of revenue in 2025. Within obesity medicine, they sell both needles and tablets.

NVO primarily sells B2B, where doctors/companies in turn sell it to their customers, but they have recently entered into partnerships with several providers to sell directly to consumers as well, B2C. All in all, I believe I get the core of it.

(1) Is ROIC stably above 15%? → Yes

(2) Is FCF conversion above 80%? → Yes

(3) Do I understand how they make money? → Yes

Okay, now we can move on.

Company Introduction and “The Business Owner’s Mindset”

What does the company do? What is their “raison d’être” (reason for being)? What problem do they solve for the customer?

Novo Nordisk is a leading global pharmaceutical company established in 1923. For over 100 years, it has helped people regulate their insulin levels. For many decades, they have assisted by delivering insulin medication in the form of injections for people who either do not produce insulin and must remain on medication for life, or those who do not produce enough and require insulin supplements. People who do not produce enough insulin are often referred to as diabetics, and diabetes is the collective term for the disease affecting those with insufficient insulin production.

Over the last 10 years, and especially the last 5, Novo Nordisk has evolved from being a leader in diabetes medication to becoming a leader in both insulin and obesity medication. By revolutionizing what are known as GLP-1 analogs, they have established a new class of medicine that helps people reduce appetite and consequently lose weight. Currently, Novo Nordisk operates as a duopoly alongside its American competitor, Eli Lilly.

Business Model

How do they make money? Is there recurring revenue (SaaS/subscription), transaction-based, or one-time sales?

• Business Model: Novo Nordisk operates much like a SaaS business, as customers (patients) often require recurring doses for life (Type 1 diabetes) or over several years (Type 2 diabetes). Those on weight-loss medication often must remain on it for life as well; to maintain results without “relapsing,” one must use it long-term and be a recurring buyer.

• How they earn money: Novo develops medicine by investing enormous amounts in pharmaceutical R&D to harvest patents. If a drug passes Phase 3 trials, it grants them the opportunity to sell the medicine at a high price to those in need. A key point is that developing medicine costs massive sums of money, and—at least within the diabetes space—only those with the deepest pockets manage to develop something entirely new.

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Business Owner’s Mindset

If you owned 100% of the company and the stock exchange closed for 10 years, would you be comfortable? Why?

Since the insulin issue is acute and currently accounts for approximately 42% of the company’s turnover—and since diabetes is expected to be a growing global problem with many people currently untreated—it is certain that even if the stock exchange closes, there will be a need for insulin medication. This means one can safely own Novo if the exchange closes for the simple reason that people must have Novo’s medicine to survive.

However, I am more uncertain about the obesity treatments. Since these will represent an increasingly larger share of the company’s earning power, it is not a “buy and forget” case.

Furthermore, the company has been adept at innovating (proven by their 100-year leadership since 1923), so one can trust that they know how to execute R&D, manage patents, and maintain strong internal systems.

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Investment Horizon

Why are you buying this now? Is it a “compounder” for eternity, or a time-limited thesis (e.g., a turnaround)?

This part is more complex. Traditionally, if the picture only concerned insulin, it would be a clear “steady-state” compounder, likely growing in line with the global diabetes market and the share of people moving from “untreated” to “treated,” plus some price increases due to market power.

However, since 2020, the company has embarked on a journey where insulin medication constitutes a smaller share of revenue each year. This means they must transition from selling expensive “luxury products” to simpler injections and, specifically, pills. This requires them to change the way they play the game, becoming much more driven by volume than price and margins.

Timeline Breakdown:

• Pre-2020: Leader in diabetes, growing with the market + price increases.

• 2020–2024: First-mover advantage in obesity meds. Focused heavily on scaling capacity (building factories and acquiring Catalent).

• 2024–2027: Faced fierce competition from Eli Lilly. Growth slowed as copycat drugs/compounders weren’t suppressed enough. Led to a leadership change: CEO Lars Jørgensen and Chairman Helge Lund were replaced by new CEO Mike Doustdar, who brought a clear focus back to insulin/obesity. Additionally, price pressure from the US government (”Most Favored Nation”) impacts margins. Margins will likely fall in late 2026/2027 as prices drop, while volume hasn’t yet fully compensated.

• 2027–2032: Insulin becomes a smaller part of revenue; obesity medicine becomes larger. Volume growth is expected to offset price pressure, and margins should recover due to economies of scale. Novo holds the patent for semaglutide (Ozempic/Wegovy), but generic attempts are already starting in China (2026), and patents expire in Europe/USA by 2031/2032. They must successfully transition customers to the next product, CagriSema, before then.

In total, the company had a lead, lost it, underwent internal restructuring, and has products facing patent cliffs in 6 years. It is a turnaround due to new leadership and a shift in innovation culture, but simultaneously a compounder because of the market they operate in.

One should understand that this is not a short-term investment. Rather, a 3+ year horizon is required. One must expect 2026–2027 to be “bad years,” with a recovery from 2028 onwards. Therefore, one should own it until at least 2028 to capture the effects of margin improvement and scale.

Financial History

ROIC (Return on Invested Capital)

Is the return consistently >15%? Is it stable over time?

First, let’s remind ourselves what ROIC is:

NOPAT is the Net Operating Profit After Tax, i.e., EBIT *(1 - tax). Invested Capital can be calculated in several ways, but the primary definition is the sum of the money tied up in the company’s operations. Invested Capital = Net Working Capital + Fixed Assets (Property, Plant, and Equipment). Fixed Assets for the year are defined as the previous year’s assets + CAPEX - Depreciation. Therefore, we see that the year’s Capex investment significantly affects Invested Capital (and thus ROIC), and deferred NOPAT (which often occurs during large CAPEX cycles) also impacts the picture.

Novo Nordisk has had the following ROIC development:

• 1992 – 1998: Around 10%; stable but low ROIC. They hadn’t “reinvented the wheel” yet.

• 1998 – 2005: Fluctuating between 15% and 30%. Some improvement.

• 2005 – 2017: Gradually increasing annually from approx. 19% to a peak of 107%. Global expansion of their analog insulins, Novolog and NovoRapid, which became world leaders.

• 2017 – 2024: Around 68%. We see ROIC falling, likely due to expiring patents and price pressure from rivals like Eli Lilly. Generally, the sheer size of the company may make it difficult to maintain such extreme figures over the long term.

• 2024 – 2026: Around 45%.

Overall, we see that ROIC increased over several decades before peaking and beginning to decline. WACC is likely around 7–10%, so an extreme amount of value is being created due to the gap, but the trend for ROIC is downward. Much of this is due to heavy Capex investments, which likely peaked in 2025.

Result: Extremely strong figures. Novo Nordisk generates extreme amounts of value.

EBIT Margin

Are margins increasing? Can they withstand inflation and increased raw material prices?

Novo Nordisk has had steadily increasing EBIT margins over a long period.

The last 5 years have been quite stable on an annual basis, though there are quarterly fluctuations where Q4 is often the weakest and Q1 the strongest.

Looking ahead, one can expect margins to fall over the next 24 months as a result of lower prices in the US.

The question is whether economies of scale will cause them to rise again from 2027 onwards.

Result: Very strong margins, which will likely fall over the next 2 years. Up from 2027?

Revenue Growth

Is growth organic or driven by expensive acquisitions?

Novo has traditionally grown by about 5–10% annually until 2021, but in the period from 2021 to 2025, revenue grew by 20–30%. Going forward, analysts expect the company to grow by approx 10–15%, largely due to obesity medications. The company is not driven by acquisitions, but by product sales.

Result: Good growth.

FCF Conversion

Does Net Income turn into Cash? (FCF / Net Income > 90%)

Around 80–100%, depending on the year and Capex. This implies they have significant cash available for acquisitions, share buybacks, paying down debt, or investing in operations.

Result: Good FCF conversion.

Capital Allocation

Is the money used for: 1. Reinvestment (Best), 2. Dividends/Buybacks, or 3. Acquisitions (M&A)?

Regarding debt, Novo Nordisk has very little, and many expect it to be debt-free within 2 years. That said, they are “average” regarding capital allocation when considering buybacks and dividends.

Morningstar states the following (though it should be taken with a grain of salt):

“We assign Novo Nordisk an Exemplary Morningstar Capital Allocation Rating... As of the end of 2024, Novo held roughly DKK 103 billion in borrowings against DKK 26 billion in cash and equivalents... Novo has used debt to finance acquisitions like Emisphere (2020), Dicerna (2021), and Catalent sites (2024). With strong free cash flows, Novo is in a solid position to continue investing in its internal and externally acquired pipeline and distributing cash via dividends and share repurchases.”

Result: Average. I dislike their approach to tiered allocation. It is fine to use money internally first, as that is the whole business idea, but dividends should be pausable if the stock is very cheap.

Market & Drivers

Is the market growing? Which megatrends are pushing the company forward?

Disclaimer: The numbers here can vary depending on the source, and one should not care too much about how accurate they are. The point is that TAM is huge and growing.

The Diabetes Market:

Novo Nordisk holds a total market share of 34% in the overall diabetes market, which is valued at approximately 120 billion USD as of 2026.

The market is segmented as follows:

• Insulin: (48% market share, worth 31 billion USD). This is a mature market where prices are under constant downward pressure from regulators and governments.

• GLP-1 Agonists: (53% market share, worth 74 billion USD). This is the most critical value driver going forward.

• SGLT2 Inhibitors: (0% market share, worth 11 billion USD). Tablets are often used in conjunction with GLP-1.

As of 2026, it is estimated that approximately 590–830 million people are living with diabetes, roughly 90% of whom have Type 2. This number has exploded since 1980, when the figure was around 108 million. Several sources claim that at least 250 million people have diabetes without knowing it or receiving help. Diagnostic practices vary wildly; in Norway, about 10% are undiagnosed, while in low-income countries, that figure can reach 80%.

Projections suggest there could be 640 million diagnosed cases by 2030 and 1.3 billion by 2050. The market is expected to grow by approximately 6–7% annually toward 2030.

The Obesity Market:

Various sources claim that as many as 900 million people live with obesity, and approximately 250 million live with fatty liver disease (MASH).

Novo’s share in the obesity market has been shifting. While Saxenda was important early on, Wegovy accounted for the bulk of the volume from late 2022 through late 2024. Obesity sales rose from just 3.6% of revenue in 2021 to 16% in 2025.

Expectations are that the weight-loss market will grow exponentially, primarily driven by the transition to pill form (oral). This makes treatment significantly more accessible and removes the barrier for patients with needle phobias.

Specifically, oral semaglutide 25 mg is vital for Novo. As of Q1 2026, they have received FDA approval and are selling through partnerships with several providers. Eli Lilly is expected to launch its tablet, Orforglipron (Orfo), toward the end of H1 2026. They are slightly delayed as of January 2026, which could potentially hint at unforeseen complications.

The obesity market is projected to grow by 460% over the next 4–5 years, while the GLP-1 market grows by 22%. While Insulin is expected to trend down due to price pressure, the total addressable market (TAM) for Novo Nordisk is expected to double over the next five years.

Competitive Landscape

Who are the biggest threats? Is there a “winner-takes-all” dynamic?

This is not a market where any single player will hold a monopoly. It will likely remain a duopoly with Eli Lilly, where both strive to maintain roughly 40% market share each.

Novo will likely remain a leader, though Eli Lilly may take the top spot in the obesity segment just ahead of Novo. The distribution between injectables and oral pills will be the most interesting trend to watch over the coming years.

For Novo, the performance of CagriSema relative to upcoming patent expirations is the most critical factor leading up to 2030. For Eli Lilly, the focus is on their triple agonist Retatrutide and the development of the obesity pill Orfo. These developments will be the primary deciders of how Novo Nordisk’s market position evolves.

Outlook (12 Months)

Over the next 12 months, we should expect margins to decline due to price reductions. Novo will likely address this aggressively in shareholder communications, focusing on how it intends to drive volume growth to compensate.

The short-term triggers for 2026 are:

• Q1 & Q2 2026: Novo has a head start in selling oral semiglutide 25mg (Wegovy in tablet form for obesity) at a price point of approximately $150. This is ahead of Lilly, which is expected to launch Orfo at the end of H1 or the start of H2.

• Distribution Channels: Performance over the next year will depend on Wegovy sales and how effectively Novo utilizes its new direct-to-consumer channel (Novo Pharma) alongside its existing provider agreements. This strategic shift is new and could drive higher sales volume now that prices are lower.

• Compounding Restrictions: The development of restrictions on “compounded” (generic/copycat) medicines will significantly impact the picture over the next 12 months.

Outlook (5+ Years)

For the next five years, volume growth will be the deciding factor in mitigating the impact of reduced pricing, especially in the US market. Furthermore, the “compounding” issue—which currently accounts for perhaps 40% of the market—will be a critical variable that heavily influences the outlook through the end of the decade.

The long-term triggers from 2026 – 2031:

• Oral Dominance: The volume growth of Wegovy in pill form (oral semiglutide 25mg) versus Eli Lilly’s Orforglipron (Orfo)

• Pipeline Transition: The clinical and commercial development of CagriSema as the next-generation treatment, which is vital for navigating upcoming patent expirations.

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Moat Analysis & Competitive Advantage

Switching Costs (Score: 5/5)

Patients who start on Wegovy or Ozempic tend to stay on them long-term. Switching medications is not a simple choice; it requires a new medical consultation, a new titration (dosage adjustment) schedule, and a period where the body must acclimate to a different drug’s side effects. Because these treatments are often lifelong or multi-year commitments, patients typically stick with the brand they know, provided it is effective and available.

Network Effects (Score: 3/5)

While a pharmaceutical product doesn’t technically become “better” simply because more people use it—as safety and efficacy are proven through clinical trials—there is a powerful “social proof” dynamic at play. Massive media coverage creates a feedback loop where patients ask for the drug by name. This awareness influences doctors; the more they see positive results in a growing patient base and hear from colleagues prescribing it, the more likely they are to follow suit.

Intangible Assets (Score: 2/5)

Under normal circumstances, Novo Nordisk’s semaglutide patents would earn a perfect score here. However, the current rise of “compounders” (pharmacies creating copycat versions) has created a significant loophole that weakens their protection. Additionally, the “Most Favored Nation” policy and government intervention in the US have reduced their historical pricing power. If the compounding issue is eventually resolved through tighter regulation, this score would likely jump back to a 4 or 5.

Cost Advantages (Score: 4/5)

Following the massive CAPEX investments in 2023 and 2024, Novo Nordisk possesses “economies of scale” in the production of complex proteins and injection pens that very few companies in the world can match. While it is difficult to say if they have a clear advantage over their main rival, Eli Lilly, they are undoubtedly the low-cost producer compared to any smaller biotech firm or late-comer to the space.

Efficient Scale (Score: 4/5)

The pharmaceutical market is a natural oligopoly because the barrier to entry is defined by billions of dollars in R&D and years of regulatory hurdles. Even if other large players eventually enter the obesity market, the “throne” is currently occupied by a duopoly. The sheer scale and risk involved in reaching this level make it unlikely that the competitive landscape will be disrupted by anyone other than a few established giants over the next five years.

Operational Excellence (Score: 2/5)

This lower score reflects a period of strategic friction between 2020 and 2025. The company struggled with supply chain issues and needs to rebuild an internal innovation culture that prioritizes solving a few massive global health problems rather than spreading resources too thin. Restoring this “scientific edge” is a primary task for the new leadership.

Culture & Leadership (Score: 4/5)

While management’s direct ownership as a percentage of the company is low (around 0.002%), the Novo Nordisk Foundation holds a 28% stake and controls the board. This unique structure is a significant advantage; it provides a “steady hand” that allows the company to invest in decade-long research cycles and ignore the short-term noise of quarterly earnings reports.

Risk Analysis

Major Risks: What could go wrong?

There are three primary threats to the current thesis. First, the “compounding” issue remains unresolved, allowing copycat manufacturers to retain up to 40% of the market. This would lead to a massive, permanent hit to Novo’s earnings. Second, while Wegovy in pill form may sell well, there is a risk that volume growth fails to offset the steep decline in price, forcing management to repeatedly downgrade earnings guidance. Finally, Novo might fail to establish a new blockbuster medication as the 2032 patent cliff approaches, or they may struggle to transition a sufficient number of patients over to CagriSema.

Competitive Risk

The most significant competitive threat is that Eli Lilly’s oral treatment, Orforglipron (Orfo), ends up outselling Wegovy by a wide margin. If this occurs, patients and doctors could become conditioned to prefer Eli Lilly’s portfolio for both obesity and insulin, shifting the market leadership permanently away from Novo.

Terminal Risk

The absolute greatest terminal risk, the kind of “black swan” event that could destroy the investment case, is the discovery of severe, long-term side effects related to semaglutide. If Wegovy or Ozempic were forced off the market due to safety concerns, the investment case would effectively end, likely resulting in a 50% or greater drop in the share price almost instantly.

Pre-Mortem: A look back from 2031. Imagine it is now five years into the future, and Novo Nordisk’s stock has crashed from 385 to approximately 180 DKK. What happened?

In this scenario, the launch of oral semaglutide 25 mg in early 2026 provided a head start that proved insufficient. Patient demand was lower than expected, and when Eli Lilly launched its own version in late 2026, Novo’s volume collapsed. Simultaneously, aggressive price caps forced margins down to a point where Novo could never recover. Compounding the issue, the “copycat” market grew instead of shrinking, and Eli Lilly successfully captured 70% of the market. Novo ceased to be a market leader, falling into the ranks of secondary players like Amgen or Roche.

Ultimately, Novo was left with massive, expensive factories that lacked the demand to justify their cost, leading to a disastrous Return on Invested Capital (ROIC). Following internal strife and a loss of shareholder confidence, the Novo Nordisk Foundation was forced to fire the CEO in 2028, marking the end of the company’s era of dominance.

Valuation & Fair Value

Reverse DCF: What growth is priced in?

At the current price of 386 DKK, the market is pricing in approximately 7.5% annual EPS growth over the coming years. This is supported by an implied Free Cash Flow Per Share (FCFPS) growth rate of roughly 6.7%.

In the context of recent years, where Novo has seen much higher growth driven by its obesity portfolio, these market expectations appear relatively conservative, though they do reflect the increased competition and pricing pressures discussed earlier.

Fair Value Calculation

To determine a realistic “Fair Value,” we can look at a 5-year projection based on the following conservative assumptions:

• Starting EPS (2025 estimate): 22.97 DKK

• Annual EPS Growth: 6.5% for the next 5 years

• Exit Multiple (P/E): 18x

• Discount Rate (Required Return): 8%

Under these parameters, the fair value is approximately 386 DKK. However, it is important to note that Novo’s actual EPS growth is highly sensitive to the successful rollout of oral medications and the resolution of compounding issues. If EPS growth targets a more optimistic 10%, the fair value rises to 453 DKK. Conversely, if you require a higher margin of safety with a 12% discount rate, the fair price would be closer to 321 DKK.

Multiple Analysis: Historical vs. Current

The stock currently trades at levels that are significantly lower than its historical averages. The average Forward P/E over the last five years has been 30.4, whereas it currently sits at 17.3. This means the company is currently being valued at a discount compared to its own history.

Furthermore, when looking at the broader Healthcare sector, which trades at an average P/E of 18.1 (or up to 25.4 in some sub-sectors), Novo Nordisk’s current multiple of 17.3 suggests it is now trading at a slight discount to its peers despite its market-leading position. Finally, the Dividend Yield tells a similar story; the 5-year average yield is 1.41%, but the current yield has expanded to 2.9%, further indicating that the stock may be undervalued relative to past benchmarks.

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That sums up the investment thesis for Novo Nordisk. Again, do note that these notes are just my own thoughts and not meant as financial advice. If you have feedback, let me know.

Thanks for reading,

Arne Ulland

In the book Atomic Habits, James Clear wrote that “You do not rise to the level of your goals. You fall to the level of your systems.” I think that is so true for much of what we seek to accomplish professionally and personally. Hence, much of what I tried to do in 2025 is understand the systems I’ve been using so far in life, find their bugs and errors, and improve them for the years ahead. The current systems are still flawed with lots of potential, but they’re getting better, and I can already see the results. That’s what matters.

As you will notice in this article, I don’t only focus on investing. Never have, never will. Step 1 is to spend energy on learning how to compound capital at high rates and doing it consistently over time. Step 2 is to compound the knowledge that will make your life balanced and meaningful which increases flexibility, happiness and safety for you, and those you care about in your life.

That means we must explore both aspects of compounding, personal and professional.

The Workout System

If there was one thing I wanted to accomplish when I wrote my New Year’s resolution for 2025 then it was to work out more, get healthier and more energized. Now, I’ve always thought I went to the gym 3-4 times a week for many years, but the results stagnated...and I couldn’t understand why.

Well, in 2025 I re-read Richer, Wiser, Happier by William Green and checked some pages from the book “The Power of Habit”. Two concepts stood out to me and somewhat explained my lack of results. The first one is what Tom Gayner at Markel refers to as being directionally correct, not perfect. I had that under control because I did put effort in, but what lacked was the focus on the accumulation of marginal gains and the second concept, which is the importance of measuring what you want to improve. I didn’t actually know how much I worked out. I just thought I worked out a lot.

“You can’t improve what you don’t measure.” - Charles Duhigg

I took that seriously and started to track everything from 2024 and 2025. What stood out to me was quite shocking. While I thought I worked out 3-4 times a week, due to some breaks here and there, vacations, flu during the autumn period, the average number through the year was closer to 2 than 4. Shocking. That meant I worked out 50% less than I thought when you look at it from a yearly perspective. No wonder I couldn’t see the effect of compounding.

These days I’m tracking every workout (or no working out for that sake) and have clear KPIs for how things are evolving. If I don’t get the results I hope to accomplish in 2025, then the system will tell me in advance, and I can make adjustments. For example, I can already see that during the summer holiday period is meaningfully pulling down the average, so next summer there needs to be some adjustments here.

So all in all, the health system is starting to become something meaningful, something that helps me towards accomplishing the goals (or at least showing me if I’m having progress or not), and I look forward to tracking this for many years forward.

The Reading System

I don’t know about you, but I don’t remember the quotes from the books I read, nor the “revelations” I had when I read them. So for the past 5 years, I’ve been on a quest to find a method or a system that ensures I remember what I read while ensuring actions take place after reading.

At first, from around 2021 to 2023, I focused on an app called Readwise. The app lets you automatically sync highlights from Kindle either by marking or by taking photos and you get a database of books and quotes that you can look at later.

Now, a mistake happened here. Since David Senra from the Founders podcast recommended Readwise and said he used it “every day,” I thought that this must be something wonderful and extremely useful for me too.

What I failed to understand, which I only now see in hindsight, was that I don’t run a book podcast where I need to pull up stories, quotes, and ideas from hundreds of books. It’s not that Readwise is bad, not at all, but I don’t consider it a good reading system. It’s more of a tool to collect quote,s and that’s good for that purpose, but it needs to be seen as a feature in a reading system, not “the system”. Note, I’ll probably continue to read in Readwise, but it will never be where I stop. Read further to see the full process.

So what’s the reading system you ask? It’s simple, effective, and more than enough to ensure that results take place.

Firstly, whenever I read a book, I try to note as many things in the book as possible with marks, writings, and sentences. If the book has some blank pages at the back, perfect! These are then my go-to places to summarize the things I must remember and/or do after reading the book. It doesn’t have to be many things, but the core things that really stand out.

Then, after reading the book, I go to my Google document and list the book in an orderly fashion, where I also either bold it if it’s very good or add bold + yellow if it’s a reread.

It was actually mastersinvest.com on X that showed me the method for how he summarized the books he’s read throughout the year, and I thought, “If I use this method and combine it with some other features, it can be great!”

Next is to go through the book and look for notes and/or use AI to summarize key points from the book to ensure that the learnings stick, and one can reflect once more.

By using this method of collecting quotes, writing down ideas, and collecting everything in an easy bullet-based form, I’m convinced that one can get far higher output from reading than simply reading a book and putting it back. At least that’s what I think now in 2025. Let’s see…

The Investment System

As I wrote in my “reflections” post about Novo Nordisk, one of the things I am to look at is how I make decisions and the use of clear rules to avoid bias. That is a working process that will continue in 2026 as I read the books below.

But I’ve also found out that I needed a checklist and a clear business strategy for how to operate more efficiently and better. I’ll for sure add this to the checklist

Another psychologically astute strategy is to perform a premortem before making any significant investment decision. That is to say, you project into the future and ask yourself a hypothetical question such as “why did this decision prove to be such a disaster?”.

One of the things I realized after thinking hard about concentration when it comes to investing is that while concentration and owning a few stocks (no more than 10) is the most optimal way to go about when it’s about generating the highest return, it’s also (at least for me) very difficult to hold on to the winners and truly let them compound for years.

I think that’s because when you have 20% in an asset that is up 200% and it’s what people are talking about on X or is reaching a premium valuation unlike before, you become worried that the best is over and all that is left is operational risk where the firm truly must meet expectations, only not to fall. At least that’s the mental trap I’ve found myself in many times when I’ve owned Apple or other stocks with 100% gain or more.

So to avoid this bias and somewhat let the firms compound, I’ve decided to implement the following rules going forward (the text is from Gemini since the original form is Norwegian).

Conclusion

So there you have it. Thanks for reading all the way down. While I could continue to write a lot about other things, I notice that I have a tendency to write very long articles and posts, so stopping at 3 things seems reasonable. If you like my sporadic and random writing or found value in the post, give it a like or a comment so I have an idea if this is valuable to someone else than just me.

I hope you all have had a good 2025. With markets being at ATH, it’s sensible to use the time to reflect and get ready for 2026. Remember:

“Make your mistakes nonfatal. It’s so fundamental to longevity. And ultimately that’s the success parameter in business, longevity”.

Best

Arne Ulland

On May 6th, I wrote a post about Novo Nordisk and how it was, in my view, a victim of its own hype. I concluded the article by saying, “No matter how I look at Novo, it appears quite cheap. I’ve been buying on the way down and doubled my position under 400 DKK. It is my largest position now.”

At the time, I operated with the following assumptions, based on market size estimates gathered from various investment banks:

Bear case: 359 DKK
In this scenario, the diabetes market grows at around 4 percent annually from 2025. Novo's market share declines from 31 to 26 percent over the next ten years, and the free cash flow margin drops from 40 to 33 percent due to pricing pressure. That gives a value of 190 DKK per share from diabetes. For obesity, I assumed the market reaches 655 billion DKK by 2035, with Novo’s share falling from 42 to 20 percent, resulting in a value of 169 DKK.

Base case: 618 DKK
Here, I assumed the diabetes market grows at 6 percent annually, reaching 1,110 billion DKK by 2035, with Novo maintaining a 32 percent market share as guided. That gives 271 DKK from diabetes. For obesity, the market reaches 976 billion DKK and Novo’s share declines to 25 percent, offset by continued market growth. This implies 347 DKK per share from obesity.

Bull case: 823 DKK
This scenario assumes 7 percent annual growth in diabetes with Novo holding a 33 percent share, giving a value of 350 DKK. For obesity, the market grows to 1,285 billion DKK and Novo maintains 28 percent market share, leading to 474 DKK per share.

Current Status

In hindsight, this investment has not gone according to plan.

Many developments unfolded differently than expected. The CEO was suddenly dismissed, and Helge Lund was unable to provide a convincing explanation, which created significant uncertainty. The company did not appoint an external CEO despite earlier indications. Novo entered partnerships with Hims and Hers, only to quietly exit a few months later. They also missed a patent payment in Canada (seriously!?)

At the American Diabetes Association event in June, data on CagriSema and Amycretin were underwhelming, with side effects raising concerns, and the positive momentum stopped. Now, guidance was lowered once again and an internal CEO was appointed, with promises to be more aggressive toward compounded versions of the drugs, but no real clarity has emerged.

I find the picture to be quite unclear. Novo’s obesity franchise faces competitive pressure, unclear leadership direction, and a market that may no longer assume smooth growth. Given the recent missteps, a more pessimistic view on future sales feels warranted, at least until better data is presented.

That said, one could also argue that the current price of 325 DKK reflects excessive pessimism. Even if the obesity franchise underperforms, Novo’s diabetes business still has meaningful value. The lowered guidance might also be strategic, giving the new CEO room to outperform. At the same time, I note that many analysts are downgrading the firm from 600-900 to 300-500 DKK.

Selling now would mean capitulating at a time when the pendulum has swung from extreme optimism to extreme pessimism, and sentiment, as always, tends to revert. At this stage, the investment case is unclear. There is a new leadership team, ongoing confusion, and very little visibility. My approach is to hold and observe, not to act out of frustration or fear, but to stay grounded and wait for clarity.

Honest Reflections and a New Operating Mode

This experience has made it clear that I need to improve my decision-making process and overall strategic thinking.

That starts with building a detailed checklist to reduce emotional bias and poor judgment. Guy Spier has long advocated for this, and his endorsement of The Checklist Manifesto helped push me in this direction. Redeye’s Quality First Investing also outlines a strong process-driven approach.

To refine this further, I am reading or re-reading the following books:

• The Checklist Manifesto by Atul Gawande

• Thinking in Bets by Annie Duke

• Seeking Wisdom by Peter Bevelin

• The Art of Thinking Clearly by Rolf Dobelli

• The Little Book of Behavioral Investing by James Montier

• The Education of a Value Investor by Guy Spier

• Devil’s Advocate by Iain Morley

• The Most Important Thing by Howard Marks

• The Psychology of Intelligence Analysis by Richards Heuer

• Poor Charlie’s Almanack by Charlie Munger

• Quality Investing by Lawrence Cunningham, Torkell Eide, and Patrick Hargreaves

• What Works on Wall Street by James O’Shaughnessy

• Principles by Ray Dalio

• Investing: The Last Liberal Art by Robert Hagstrom

• Quality First Investing by Björn Fahlén

We are often our own worst enemies. Without a structured, repeatable, and emotionally neutral process, I do not see how one avoids costly mistakes.

Just as important is learning to see every investment from both sides (I want to thank Tiho Brkan for helping me understand the value of having two opposing ideas). On one side is the typical bull case, strong fundamentals, compelling story, and attractive opportunity. On the other hand is the much harder perspective: playing your own devil’s advocate. This means trying to short your own idea with seriousness and objectivity.

In Novo’s case, a bear might argue that the market has more faith in Eli Lilly’s pipeline. The Novo Foundation and board may have lost conviction. The strategy to counter compounded drugs has not yielded results. What if patients focus on cheaper alternatives? What if capex spending produces mediocre returns? What if this is now a binary outcome — one where obesity dominates the valuation and long-term success hinges on a few uncertain milestones?

Looking Ahead

For the rest of 2025, I plan to redefine my process. That includes building structured material, documenting my thoughts, and writing Volume II of my investing guide. My goal is to operate in a way that protects the downside first because if the downside is managed, the upside tends to take care of itself. I hope you follow along in 2025 and 2026 and learn along with me because now it’s time to get serious. While this investment didn’t go according to plan, and it has been an expensive lesson, I do believe it will be a valuable one because at one point, the market will turn sour and “nothing will work anymore”. Before that happens, I need to ensure I’m as prepared as I can be, and doing these necessary changes will certainly improve the likelihood of strong compounding ahead. Ten years from now, I believe I will look back at this moment and the system that came from it with gratitude.

Warm regards
Arne Ulland

Background

I’ve been fascinated by Novo Nordisk since 2019, the year I wrote my master’s thesis on Nordic family firms. One of our key findings was that a value-weighted portfolio of Nordic family firms generated an average monthly abnormal return of 2.19% from 2000 to 2019 and we discovered that one company stood out and that was Novo Nordisk, the Danish market leader in diabetes care. Due to its substantial size, Novo Nordisk had a dominating effect not only on the Danish sub-portfolio but also on the overall Nordic value-weighted portfolio, significantly shaping the portfolio’s return.

Seeing these results, we had to ask ourselves: how could such a huge firm constantly be undervalued by the market?

After exploring several possible explanations, we concluded that the primary reason for the company’s outperformance was the consistently underestimated growth in global diabetes prevalence.

Initial forecasts at the start of the 2000s significantly understated the scale and acceleration of the diabetes epidemic. In the influential article Global Prevalence of Diabetes: Estimates for the Year 2000 and 2030 (Wild, Green, Sicree & King, 2004), researchers projected global diabetes prevalence to reach 4.4% by 2030, growing from 171 million in 2000 to 366 million people by 2030. Later, Shaw, Sicree, and Zimmet (2010) revised these estimates, projecting that by 2010, 6.4% of the global population or 285 million people, would be living with diabetes, increasing to 7.7% or 439 million by 2030.

However, actual developments outpaced even these updated predictions. By 2019, global diabetes prevalence had already reached 9.3%, affecting 463 million people, ten years ahead of prior forecasts. Newer estimates now anticipate prevalence to rise to 10.2%, or 578 million people, by 2030 (Saeedi, Petersohn, Salpea, Bright & Williams, 2019).

In retrospect, it is evident that earlier forecasts were systematically too conservative. As real-world data consistently surpassed expectations, estimates were revised upward year after year. This had a compounding effect on Novo Nordisk's business outlook, reinforcing its dominant market position and revenue trajectory in ways that investors could not have anticipated ex-ante.

Therefore, while investors likely priced Novo Nordisk fairly given the information available at the time, the firm continued to benefit from these recurring upward revisions in diabetes forecasts. This created a dynamic where the company’s valuation improved incrementally, not due to irrational exuberance or market inefficiency in the traditional sense, but because the underlying market opportunity proved to be significantly larger than originally assumed. It is this structural underestimation of future demand, rather than classic mispricing, that best explains the persistent excess returns observed in our data

Note: I will use charts from Finchat in the portfolio holdings discussion. I’ve tried pretty much all services and find Finchat to be the best due to their “Segments and KPI” charting option. That alone is a reason to use the service and I highly recommend it. Feel free to use my affiliate account to grab a 15% discount here

Will this happen with obesity drugs too? That’s the question. Note that I see the diabetes segment as consumer staples, and obesity as consumer discretionary, meaning consumers don’t necessarily need it. That somewhat changes the perspective.

And That Brings Us to Today…

Or actually, let’s rewind a bit, back to 2024, when Novo Nordisk peaked at 1,005 DKK on June 1st. What was the talk of the town back then, and what were the expectations that could justify the stock reaching an unprecedented P/E of 50?

A list of 10 causes that can summarize the optimism:

1. Blowout earnings and raised outlook: Novo Nordisk reported first-quarter 2024 results that beat analyst expectations, with net profit (~DKK 25.4 billion) up ~28% and revenue (~DKK 65.3 billion) up ~22% year-on-year, driven by Ozempic/Wegovy demand. The company nudged its full-year guidance higher (forecasting ~19–27% sales growth, vs. 18–26% prior), exceeding consensus and fueling optimism that growth was outpacing earlier projections.

2. Surging sales of obesity drugs: Demand for Novo’s weight-loss treatments vastly outstripped expectations. In Q1 2024, Wegovy sales more than doubled (+107% year-on-year) and Ozempic sales jumped ~35%, far above typical growth rates. This extraordinary uptake, so strong that supply had to be rationed in some markets, underscored Wegovy’s blockbuster status and signaled the revenue potential was even higher than investors had anticipated.

3. Bullish analyst commentary and upgrades: Sell-side analysts and investors grew increasingly positive as Novo’s prospects expanded. Guggenheim analysts noted the new obesity pill “amycretin” will likely “form the foundation” of Novo’s future pipeline, and Berenberg estimated that nearly half of Novo’s lofty valuation was already tied to its promising pipeline of new drugs. Such commentary, alongside price target boosts, confirmed that recent news had shifted expectations upward for Novo’s long-term earnings power.

4. Massive market potential (TAM) recognized: The total addressable market for obesity treatments became a focal point. Analysts projected the obesity drug market could be worth roughly $100 billion by 2030, a figure higher than previously appreciated.

5. Positive clinical trial surprises (pipeline): Novo delivered upbeat trial results that exceeded expectations, indicating its pipeline could extend its dominance. Notably, in March 2024 the company announced an experimental oral obesity drug (amycretin) helped patients lose ~13% of body weight in just 12 weeks (about double the 6% loss Wegovy produced in 12 weeks). Investors cheered this early-stage data, the stock jumped over 8% to record highs on the news as it suggested Novo has game-changing follow-up therapies beyond Wegovy, shifting sentiment even more bullish.

6. Regulatory approvals expanding the market: Breakthrough approvals in new geographies added to the euphoria. For example, at the end of June 2024 China’s regulator approved Wegovy for long-term weight management, opening access to the world’s largest population of overweight individuals.

7. Capacity expansion and supply improvements: Novo moved to rapidly scale production, reassuring investors that it could meet booming demand. Management highlighted efforts to “beef up” manufacturing, including acquiring three Catalent facilities to boost output and in June announced a $4.1 billion investment in a new U.S. factory to fill Wegovy/Ozempic injection pens. These actions to alleviate supply constraints (which had capped sales) signaled that Novo could deliver more volume than previously possible, encouraging the market to raise its sales forecasts.

8. Exuberant investor sentiment and market-cap milestones: Novo Nordisk’s weight-loss franchise turned it into a market darling, and success fed on itself. By mid-2024, surging earnings had propelled Novo’s shares to all-time highs, and the company had overtaken LVMH as Europe’s most valuable firm. Novo became a must-own name for growth portfolios.

9. Shifting medical and payer landscape: Growing evidence of health benefits from obesity drugs also boosted Novo’s outlook beyond prior assumptions. A large 2023 trial showed Wegovy yields a 20% reduction in cardiovascular risk for obese patients, helping recast the drug as a true medical necessity rather than a lifestyle aid. By 2024 Novo was leveraging this data to persuade health insurers that treating obesity would cut heart disease costs. The prospect of greater insurance coverage and broader medical adoption meant the potential patient pool, and long-term sales, could be even larger, contributing to the stock’s strong rise.

10. Limited competition and protected market lead: Investors recognized that Novo’s obesity juggernaut was secure from near-term competitive threats. Aside from Lilly, no other major rivals were close to launching competing therapies, and Novo’s key patent on semaglutide (Wegovy’s active ingredient) still had years before expiry in its biggest markets (2031 in Europe, 2032 in the U.S.). With generic competition effectively barred in the mid-term and would-be competitors still in trials, Novo appeared poised to enjoy an extended period of market exclusivity. This first-mover advantage was greater than many had initially expected, and it bolstered bullish sentiment that Novo’s high growth and pricing power were sustainable.
    

In conclusion, a short-term upgrade in sales forecasts, combined with massive capital expenditures to support supply, positive regulatory actions, a huge total addressable market, and limited competition caused investors to bid Novo up to the sky.

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What about the massive 60% drop?

The CagriSema Selloff

The main trigger was the disappointing results from CagriSema, Novo Nordisk’s next-generation obesity drug candidate intended to follow up on the success of Wegovy (a weekly injection) and compete directly with Eli Lilly’s Zepbound, also known as Mounjaro. In December 2024, CagriSema delivered an “expected” weight loss of 23%, falling short of the ambitious 25% target. The market reacted sharply and the stock plummeted 27%, wiping out $125 billion in market value.

Then, in March 2025, the REDEFINE 2 late-stage trial delivered another blow. CagriSema achieved a 13.7% reduction in weight, below the hoped-for 15%.

Two key dynamics were at play:

A) Novo made a strategic misstep by setting expectations unrealistically high, which capped potential upside and created a fragile setup where only "perfect" results would be acceptable given the lofty valuation.

B) Investors and analysts were looking for clear evidence that CagriSema could outperform Mounjaro. That confirmation never came. As a result, the consensus shifted: Eli Lilly appeared to be pulling ahead in the obesity drug race, with the superior product and growing market share.

“CagrisSema is only as good as Zepbound, but more complex to manufacture” - Markus Manns, portfolio manager at mutual funds firm Union Investment

Cocktail of bad news

Then came a cocktail of bad news for Novo Nordisk. Zepbound began to outpace Wegovy in U.S. prescription growth, raising investor concerns about whether Novo’s massive capex investments in supply expansion would deliver the expected returns. At the same time, the company faced a string of headwinds: rising price pressure, analyst downgrades, weaker-than-expected sales, U.S. tariffs, and Medicare price negotiations, all of which contributed to mounting uncertainty.

To make matters worse, compounders, which CEO Lars Fruergaard Jørgensen has said could represent 30–40% of the Wegovy market, continued to erode revenues. One could also mention the debate over environmental and political issues tied to the Grenland project in Denmark and its ties to U.S. policy, but frankly, that’s a macro rabbit hole I don’t even want to go down right now.

I’ll also add that the annual general meeting didn’t really help that much either where the charmain of the board clearly stated that they have a rule based approach to capital allocation, which is something I’m not fond of as I tweeted below.

Sound Capital Allocation, Anyone?

One thing I don't like about $NVO is their rule-based, sequential capital allocation mindset, which doesn't appear flexible. They prioritize reinvesting for growth above all else (good), then innovation, then M&A & lastly repurchases. Shareholders would appreciate buybacks here.

Helge Lund, the chairman of the board, explicitly apologized for the stock price development but said that over the long term, due to Novo's investment activities, he expects things to converge. Fine, but to then say they don't expect to do buybacks in 2025 appears illogical.

The way I think about capital allocation is that it's about assessing the choices at hand & focusing on what can create the best value for owners, both short & long term. If it were only about making sure the business stays relevant, then everyone could just invest for growth

Hence, I don't want to hear 'we don't expect to do buybacks in 2025,' as it appears rule-based and not grounded in sound capital allocation principles, where you stay flexible, assess the options at hand, and choose the one that creates the most value.

Eli Lilly’s Orforglipron

Finally, the news on April 17 that truly caused Novo Nordisk to crash was Eli Lilly’s announcement of positive results for its oral pill, orforglipron (“orfo”), which showed highly competitive efficacy. In the Phase III Achieve-1 trial for patients with type 2 diabetes, participants lost up to 7.9% of their body weight over a 40-week period using the 36 mg dose. These results outperformed Novo Nordisk’s Rybelsus (14 mg oral semaglutide), once again demonstrating that Eli Lilly is strengthening its market position in the oral segment (from what I’ve seen, this is what most analysts care about. Eli Lily now has a scalable oral obesity drug while Novo doesn’t).

What now? - The Investment Thesis

There are many things to say here, and they somewhat differ in category.

Risk goes up when fundamentals don’t follow the price

Risk increases as stock prices rise, because expectations rise too, leaving little room for error. That’s essentially what happened in December with the CagriSema results. Novo Nordisk set themselves up for disappointment by guiding for 25% efficacy, which was very ambitious. That’s on them, and I believe some of the negative price reaction could have been avoided with more cautious guidance.

Compounders easy off, Hims & Hers partnership, Guidance reinstatement

The issue with compounder, so-called “copycat” producer, is starting to ease. For context, U.S. compounding pharmacies have been legally permitted to produce copies of Novo Nordisk’s obesity drug Wegovy and diabetes drug Ozempic (both chemically known as semaglutide), due to a drug shortage ruling by the FDA. This situation has limited Novo’s sales growth (and $LLY), as these compounders have accounted for an estimated 30–40% of total sales, according to CEO Lars Fruergaard Jørgensen.

However, the FDA has now declared the shortage over and given compounders until May 22 to stop selling copies of the drug. Novo (and $LLY) has also taken legal action against several compounder, not just on the basis of patent infringement, but also because some of these unregulated versions contain non-FDA-approved ingredients.

Adding to the momentum, Novo announced a partnership last week with Hims & Hers to sell Wegovy directly to consumers, which should further boost sales growth in the second half of 2025 and beyond. While this won’t impact Q1 results, one could argue that H2 Wegovy sales are now expected to exceed what analysts assumed just months ago (when they were quite pessimistic)

This brings us to guidance reinstatement, something many analysts have been very concerned about. The company previously guided for 16–24% revenue growth and 19–27% operating profit growth, but investor confidence has wavered amid regulatory and pipeline uncertainty.

Notably, under Danish financial regulations, Novo Nordisk is required to update the market as soon as management determines that the midpoint of any new full-year projection falls outside the previously communicated range (as highlighted by TD Cowen). Since no such announcement has been made yet and Q1 results are tomorrow, I expect guidance to be reaffirmed, and that could serve as a short-term catalyst for the stock price.

More importantly, it signals that, over the long term, the FDA clearly favors established players like Novo Nordisk and Eli Lilly. That regulatory preference is no surprise, but it reinforces the expectation of consistent, protected obesity medicin.

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Misconception: “One Winner Takes All”

Many have used this argument, and I’ll use it too, because I think it’s true: the obesity market is not a “winner-takes-all” scenario. Eli Lilly and Novo Nordisk have competed side by side for years, and they will continue to do so. Right now, the market seems to be painting an overly negative picture, likely driven more by the stock’s recent decline than by any fundamental shift in long-term dynamics.

I’ve been investing for 15 years, and if there’s one pattern that holds, it’s this: analysts, the media, and investors are rarely balanced. They’re either too optimistic or too pessimistic, there’s hardly ever a middle ground. And in my view, that’s exactly what’s happening here.

Is Eli’s Pipeline Really That Much Stronger?

Let’s start by comparing some data of Novo Nordisk’s Ozempic drug 1 mg and 2 mg versus Orfo 3 mg, 12 mg and 36 mg.

We note that Orfo 36 mg delivered the highest weight loss at the end of the study, confirming it as a strong contender in the obesity drug landscape. However, it's important to consider the side effect profile: 14% of patients experienced vomiting, 26% had diarrhea, and 8% discontinued treatment, figures that may weigh on long-term adherence and market acceptance.

Now, if we compare Novo Nordisk’s oral semaglutide 14 mg and 25 mg with Orfo, as highlighted by Nordea, the data shows comparable efficacy, which significantly narrows the perceived gap between the two treatments.

Ultimately, this isn’t just about weight loss efficacy, it’s also about the ability to safely and reliably meet global demand over the long term. On that front, I believe Novo Nordisk remains highly competitive with Eli Lilly, thanks to its decades-long track record in scaling complex treatments, its deep manufacturing expertise, and its position as the market leader in diabetes. The long history of direct competition between these two companies only strengthens Novo’s ability to execute in this new and rapidly growing obesity market.

Valuation too attractive to ignore

Reversed DCF

Using a reversed DCF with a 12% desired return (discount rate), I find that Novo Nordisk needs to grow its free cash flow (adjusted for stock based compensation and growth capex) at roughly 11% annually over the coming decade. That seems plausible given the company's current growth phase and the rapid expansion of the obesity treatment market. It’s also broadly in line with historical averages, and analysts are currently projecting around 15% growth with 20% growth the next 5 years.

3 Stage DCF

Running a three-stage DCF with a 12% discount rate, assuming 20% growth in years 1–5, 6% in years 6–20, and 3% in perpetuity, I arrive at an equity value of approximately DKK 2,800,000, translating to a share price of about DKK 630 (861 DKK if WACC is 10% instead and 430 DKK if requiring 15% return).

If we want to take a stricter view, applying a 15% discount rate, assuming 15% growth in years 1–5, 6% in years 6–20, and 2.5% in perpetuity (to align with GDP growth), we get a fair value of around DKK 350 , which interestingly was “close” to the recent bottom.

A more balanced “base case,” more aligned with consensus expectations, would use a 10% WACC, 15% growth in years 1–5, 4% in years 6–20, and 2.5% in perpetuity. This yields an equity value of DKK 2,600,700, translating to a share price of roughly DKK 586.

Rochon Method

If one uses the Rochon method with “normalized” P/E of 25 and expected growth rate at 15% the next 5 years, one can see that a 15% return could be doable at 570 DKK and 12% at 650 DKK.

Multiples

As for multiples, on that front, Novo Nordisk actually looks attractive.

In conclusion:
No matter how I look at Novo, it appears quite cheap. I’ve been buying on the way down and doubled my position under 400 DKK. It is my largest position now.

You’ve probably noticed I haven’t spent much time here on historical metrics like ROE, ROIC, and the like. That’s intentional. There are already countless posts and tweet threads covering those numbers, and to be honest, I find them a bit backward-looking and, frankly, boring. Of course, they matter and tell you a lot about a company’s underlying quality. But any real analysis should also include operational context, what’s happening on the ground, what’s driving sentiment, and how the company is positioned going forward.

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Let’s see how things go tomorrow. I don’t expect a great report, but want to hear that guidance is restated and how Novo will tackle supply issues.

Best

Arne Ulland

Here’s a recap of the advice I shared with their readers at the time:

HOW TO BUILD A PORTFOLIO LIKE ULLAND

According to Arne Magnus Lorentzen Ulland, anyone can start building a solid portfolio by purchasing small shares in good and profitable companies. Here are his tips for Dine Penger readers to follow his method:

1. WHY: Determine what your fundamental reason is for buying stocks. Is it because you want to gamble, or do you want to invest with a long-term perspective?

2. IDENTIFY QUALITY COMPANIES: If you want to invest in quality companies, start by identifying companies that are profitable and actually make money. A good way to do this is to find a long-term graph of the stock price. If it has been stable and steadily increasing over several years, then it is probably a boring, reliable company that is stable and makes good money.

3. SOLID CHOICES: If I had started from scratch today, I would begin by identifying companies that are all around us, the ones we use frequently in everyday life.

4. ADDITIONAL KNOWLEDGE: You don’t necessarily need to study economics to be good at stocks, but it can be useful to learn how a company makes money over time in a market cycle and improves its operations. It can also be beneficial to have an understanding of macroeconomic conditions and how value is created in society.

5. STAY RATIONAL: Spend less time on stock recommendations and news, and more time getting to know companies better—either by reading annual reports or discussing with investors who share the same mindset. Becoming a rational investor is also a long journey where you need to get to know yourself, what you fear, and what your strengths are. In the end, it’s about keeping your emotions in check by doing thorough preparation and thinking through different scenarios before things go wrong.

6. FIND BALANCE: The most important thing is to get the right balance between offensive and defensive investing in your portfolio.

   • The higher the stock prices and the better the market outlook, the more defensive you should be.

   • The lower the stock prices and the worse the market outlook, the more offensive you should be.

Looking back at the list above with the benefit of hindsight, I see a few important points worth adding when it comes to preparing for a stock market crash. So, how do you prepare for a market crash or correction, and what exactly should you focus on?

How and what to prepare?

The first thing that comes to mind is conducting a thorough assessment of your portfolio’s overall quality, focusing on fundamentals. You want to evaluate key factors such as:

• Are my companies profitable? Consistently profitable businesses are more resilient during downturns.

• Do they operate with high margins? Strong margins provide a cushion during tough times, helping companies weather economic downturns without drastic cost-cutting.

• Are they carrying minimal debt? Companies with low leverage are far less vulnerable when credit conditions tighten. As the saying goes, "To finish first, you have to finish."

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This assessment might look something like this:

The next step and this is where we get to the core of the process, is to assess the value of every holding in your portfolio, as well as all the companies on your watchlist.

Nothing helped me more during the pandemic than having a pre-defined list of target prices: low, base, and high. This provided a clear framework for tracking which companies experienced a dramatic drop, allowing me to identify those trading at a substantial discount to their intrinsic value.

Here’s what that looked like back in 2020.

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The full watchlist at the time included the following firms:

There are quite a few things I would approach differently now.

One key change is assessing the expected return potential for each holding across different price points, rather than relying solely on a single fair price estimate. This provides a clearer picture of risk and reward at various valuation levels.

Here’s what that might look like for a company like Visa:

Secondly, I would focus more on prioritization, categorizing companies into different tiers based on their quality, valuation, and long-term potential. This helps ensure that capital is deployed more efficiently when opportunities arise.

Here’s an example of how this could look (not a complete list):

• Priority 1: High-conviction companies trading at a significant discount to fair value with strong fundamentals and competitive advantages or simply firms where you have the highest conviction.

• Priority 2: Solid companies with good long-term prospects but trading at a smaller discount or where you have less conviction.

• Priority 3: Speculative or lower-priority opportunities that could be interesting under the right conditions.

This structured approach would have helped refine decision-making during market downturns.

By following these steps, you gain a much clearer understanding of what you own, the right price to pay for each holding, and what to prioritize when the time comes.

Prior preparation prevents poor performance - James Baker

When the market takes a dive, I can assure you that trying to figure these things out in real time while watching prices drop 10 to 30 percent as we saw in March 2020 is nearly impossible.

Preparation is everything. Stay ready and best of luck out there.

Best,

Arne Ulland

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Torghatten Capital Annual Letter 2024 Arne Ulland

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4th of February 2024

Dear Fellow Compounders,

The idea of writing a comprehensive annual letter has been on my mind for a long time, especially a letter that not only focuses on the principles of sound investing but also on one that goes one level further.

A letter that first and foremost acts as a guide on what principles one must learn, understand, and continuously remember to ensure that one succeeds in multiple domains, including investing but first and foremost, in life. That doesn’t mean I necessarily have succeeded yet, but I think I’m starting to understand what success means on a broader scale and I’m also starting to see the compounding snowball move faster and faster.

While some find comfort in maximizing one particular niche or subset, the real challenge in investing and life is understanding and doing reasonably well over many domains. Few individuals have done this better than the engineer and inventor Leonardo Da Vinci and investor Charlie Munger, and those remarkable individuals will always be the guiding stars for what it means to truly understand something.

Aiming for simplicity was a key topic for both of them, including the mathematical genius Albert Einstein, and I hope that throughout this annual letter, you see that keeping things simple is a core part of my investment strategy, and the reason is plain simple, it works.

“Simplicity is the ultimate sophistication” - Leonardo da Vinci

"Take a simple idea and take it seriously" - Charlie Munger

“Everything should be made as simple as possible, but not simpler” - Albert Einstein

Now, this annual letter is divided into three sections:

Part I, called Principles of Investing, is about the strategy of investing in equities through long-term investing through quality stocks and the mindset I believe one must have to succeed at this. I believe Part II makes more sense after one has read about the strategy because is it interesting to talk about the result without knowing the process? I don’t think so.

Part II is the traditional annual letter commentary that you’re used to from other funds with performance overview and holdings.

Part III, called Principles of Life, is about fundamental principles that anyone can use to navigate life a bit more consciously. I don’t want to pretend that I have all the answers, by far. The thoughts written down are mostly lessons learned after reflecting on mistakes and experiences, and I write this down just as much for me as for you.

I want to thank you for taking the time to read this letter. My hope and wish is that you learn something and bring the lesson forward to someone else. The best thing we can do is to help other people.

Feel free to reach out if you have comments or questions.

Best,
Arne Ulland

LinkedIn: Arne Magnus Lorentzen Ulland | LinkedIn
X: Arne Ulland (@ArneUlland) / X
Mail: arneulland@gmail.com

Part I - Principles of Investing

Principle I - Quality can only be understood through comparison

Torghatten Capital is a high-quality-focused investment fund with a global mandate. That might seem surprising since I’m just a private investor managing my own money. So why call it a fund? The reason comes from one of the best pieces of advice I’ve ever received from a highly successful Finnish investor: If you want to succeed over time, treat investing like running a business.

This means training your mind to think critically about risk and reward while also documenting what you should and shouldn’t do. The real benefit of writing down your strategy is focus. If you’re familiar with the podcast Founders, where David Senra reads hundreds of biographies about investors, founders, and business leaders, one theme comes up again and again: focus. This is an attempt to do just that.

The fund focuses on Quality. The typical definition of quality that nearly everyone uses includes:

1. Strong competitive advantages.

2. Trustworthy and honest management with a long-term approach to business operations.

3. Profitable operations that lead to increased earnings per share and free cash flow per share.

4. Smart capital allocation, balancing dividends, buybacks, mergers, and acquisitions.

Another example is from the book Quality Investing:

“Three characteristics indicate quality. These are strong, predictable cash generation; sustainably high returns on capital; and attractive growth opportunities. Each of these financial traits is attractive in its own right, but combined, they are particularly powerful, enabling a virtuous circle of cash generation, which can be reinvested at high rates of return, begetting more cash, which can be reinvested again.”

That’s all good, but it feels a bit too simplistic. So let’s take some time to explore what Quality actually means.

First, we all intuitively understand Quality in a broader, more practical sense. A house built by someone with an eye for Quality has a higher chance of surviving a storm because the construction process involves more thought, precision, and resilience.

In investing, many companies perform well when economic conditions are favorable, but most disappear when times get tough. Over decades, only a few survive, and the best firms often seize the opportunity to gain market share during crises. These firms possess something different, something that’s hard to pinpoint just by analyzing a balance sheet or running the numbers.

One reason for this is that Quality might actually be undefinable, yet we recognize it when we see it. Robert Pirsig, in Zen and the Art of Motorcycle Maintenance, wrote:

"Quality cannot be defined. It can only be understood intellectually through the use of analogy."

I believe this means that Quality is why you know a book is great or a piece of music is beautiful before conducting a thorough analysis. You just know it.

There’s something almost magical about the fact that people across different demographics and geographies universally agree that the Harry Potter books are great. This isn’t simply because of the words on the page. High-quality writing isn’t something that can be copied by using the same words, sentences, or even the same story. Quality can only be understood through comparison.

The Quality Triangle

That brings me over to the Quality Triangle which states that 3 things are of utmost importance for the strategy: 1) Historical numbers, 2) Management and 3) Forecastability

Historical numbers:

“History doesn’t repeat itself, but it often rhymes” is a classical saying and while past performance may not be indicative of future results for all stocks, I believe it definitely is for a subset of tested high-quality stocks in the market. Such firms have for decades shown healthy growth, strong gross margins, and operative margins as well as high return on capital employed.

The idea of investing in yesterday's winners is so ridiculously easy to understand but few people accept it because it appears too easy.

Let’s say you own a burger shop, and things are going well. Margins are solid, customers keep coming back, and you’re making a nice profit. The price people are paying is well above what it costs to make the burgers, so money keeps rolling in. Business grows, and with little competition, life is good.

Then one day, on your way to work, you spot a brand-new burger shop right around the corner. There’s a huge line outside. Wait, weren’t you the go-to place in town? Turns out, the new competitor is selling burgers for half your price. So, you do the only thing you can: lower your prices too. A brutal price war begins, and before long, both of you are barely making a profit.

To keep things going, you decide to take on some debt and expand. Even if margins are thin, selling more burgers should help. For a while, it works, profits climb again. Then, out of nowhere, interest rates shoot up, and debt payments start hitting hard. Suddenly, the numbers don’t work anymore. A few months later, you’re out of business. Just like that. That’s the reality of margins, competition, and why having a real business moat is so damn hard.

The point of the story is naturally that a firm that then manages for a very long time to endure that competition despite continued challenges, innovations, and market trends, is not only a good firm but a rare firm, a Quality firm. A firm that continues to do well and it’s likely to continue doing so unless things dramatically change. Hence, historical numbers mean a lot, but you naturally must evaluate the firm because things can change, it just doesn’t happen overnight.

Management

If only one attribute could be written down I’d say clarity stands above all. Clarity means focus, it means quite often that incentives are aligned, that they try to maximize shareholder value for the long term, and that they continually say the same things (values, vision, and ambition) over and over.

One way to understand clarity in terms of management is whether they are saying things in an easily comprehensible way which is possible to understand for most people.

The best way though in my opinion to gauge if management is playing the long game or not is if they are talking about return on capital employed / return on capital invested, and/or if they are allocating capital smartly and silently.

Again it’s pretty simple: Buy shares when the firm appears undervalued, don’t buy shares when the firm is overvalued, and don’t dilute shareholders by raising cash at undervalued levels.

High profitability levels over the long run tend to be the easiest and quickest way to assess if you’re partnering with people who are running the company with a long-term mindset.

Forecastability

What we want here are reasonable business metrics, like good growth, not slow growth, but also not too fast. Preferably, we’re looking for stable margins and revenue growth of around 10-15% per year. Why? Because when things seem too good to be true, they usually are. It attracts too much competition.

You need to be reasonably sure that the firm will operate and be valued similarly to how it has been in the past. Very few firms behave that predictably, hence the importance of this subset of businesses. For most companies, you can’t forecast the future well, but for some firms like Visa, you might be able to provide a decent valuation within a couple of minutes which won’t be terribly off (at least not compared to a traditional DCF).

For example, you can estimate future EPS by taking the expected EPS for the next 12 months, applying an earnings-per-share growth rate over the next five years (based on analyst projections and/or reasonable historical trends), and then multiplying by the expected P/E ratio in five years (using historical averages). And voilà, you have a decent estimate of future EPS. The final step is simply discounting it based on your preferred annual return target.

Let’s talk a bit about what’s reasonable to expect in the valuation of a stock since analyst estimates of a specific price are so commonly used and referenced when making buying and selling decisions.

I often say in interviews that a basic understanding of statistics is one of the most valuable skills to have. Why? Because the world tends to reward confidence, and people assume that the more certain you sound, the more knowledgeable you must be. But reality doesn’t work that way.

A simple example makes this clear. Imagine asking a stranger how long their commute takes. They say 45 minutes. That’s a single point, a fixed answer. Now ask for the fastest and slowest time they’ve ever made the trip. They say 30 minutes at best, 60 at worst. Does that mean there’s an equal chance of the commute taking 30, 45, or 60 minutes? Of course not. The average might be 45 minutes, but most trips likely fall within a tighter range—say, 40 to 50 minutes—following a pattern known as a normal distribution.

Stocks work the same way. Valuations don’t settle on precise numbers; they form a range. The key is recognizing two things. First, precision isn’t the goal when buying or selling stocks. As long as the numbers make sense within a reasonable margin, that’s good enough. Second, when something is trading far outside its expected range, you’re dealing with an outlier, either excessive optimism or deep pessimism has been priced in.

What matters is assessing the situation as it stands. That mindset has served me well when investing. I don’t try to predict where the price will be tomorrow. Instead, I focus on the present and if it looks attractive here and now, I buy.

Mindset

When it comes to mindset, the strategy is quite clear. The fund strongly believes in the power of compounding, so naturally, avoiding disruptions to that power is a top priority. Additionally, opportunity cost, the cost of switching from A to B, is a crucial consideration. It’s essential to have a fair and objective assessment of why and what is gained by replacing something that works with something that might work.

As such, the firm prioritizes inactivity, avoiding the temptation to chase the next big thing or replace a quality company with another. Experience has shown that, in most cases, it would have been better to remain inactive and simply sit on one’s hands rather than engage in unnecessary trading.

That said, this doesn’t mean the fund is completely passive. It operates with a buy-and-reevaluate mentality, meaning that every stock in the portfolio is continuously monitored in terms of valuation, potential forward returns, and risk outlook.

The last point is particularly important: for some reason, many investors assume that when stock prices soar, risk decreases. In reality, it’s the opposite. The further a stock price moves away from its intrinsic value, the greater the risk. This is why consistently measuring the gap between intrinsic value and stock price is essential for any investor, whether active or inactive.

Lastly, it’s important to acknowledge that conviction can sometimes weaken, whether due to personal doubts or changing market conditions. In such cases, Torghatten Capital will always attempt to at least wait one day before taking action to see if the sentiment remains the same. Experience suggests that most things don’t seem as crucial or urgent once a day has passed. This simple pause helps prevent impulsive decisions and reinforces a disciplined, long-term approach.

One more thing - News wants you to react and it doesn’t matter if they are right. I call this The News Matrix. The picture says enough.

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Principle 2 - Most of the job is just about keeping things simple and avoiding bad stuff

Simplicity is the guiding star in my investment approach, and what’s easier than making sure you invest in companies that, over the long run, create value? How do you measure that? No need to overcomplicate things.

Value in a money-based system is just the difference between the cost of borrowing money and the profitability of the money you put to work. In other words, the gap between Return on Capital Employed (ROCE) or Return on Invested Capital (ROIC) and the company’s Weighted Average Cost of Capital (WACC).

Unless you enjoy spending hours doing unnecessary Excel calculations with no real practical meaning, just assume the average cost of capital for most firms is somewhere between 8-12%. That’s more than enough to work with. So how do we answer the question about which things to avoid? By making sure we don’t invest in things that over the long run don’t manage to get an ROCE/ROIC above 8-12%. Simple as that.

Things that are difficult to assess

Let’s now list some things that Torghatten Capital finds to be very difficult to assess:

1# Assessing the Value and Investment Risk of Innovative Hyper-Growth Firms
Hyper-growth companies are often valued based on total addressable market (TAM) estimates, which are not only rarely accurate but also fail to account for risk aversion and/or increases in interest rates, which highly affect the terminal value of such firms. Hence, valuations are highly sensitive to macroeconomic conditions and stuff that Torghatten Capital isn’t particularly interested in paying attention to/or finds easy to evaluate. Given these factors, Torghatten Capital sees no reason to engage in such investments.

2# Investing in Commodities, Geared Products, Trading, Derivatives, Cryptocurrencies, Options, Betting on Macro Events, or Forecasting Interest Rates
Torghatten Capital believes in keeping investing simple with a focus on strong fundamentals that hold up over the market cycle and few "exciting" investment alternatives outperform a global index in the long run. Additionally, given that no one can consistently predict interest rates, recessions, or market cycles, there is little reason to believe that I can do so. Therefore, Torghatten Capital sees no reason to engage in these types of investments.

3# Investing in Companies with Revenue or Production Risk Tied to Geopolitical Tension
While such companies may appear undervalued on paper, they are often difficult to hold over the long term due to unpredictable risks. Out.

4# Using Stop Loss or Trailing Stop Loss Strategies
Experience has shown that these methods not only undermine rational decision-making but also make investors hostages to volatility. Torghatten Capital will not use such strategies.

5# Investing in Small Caps with High Customer Concentration
Even when a company appears stable, a high concentration of revenue from a few customers introduces significant, often hidden, risks. One can never fully grasp what’s happening beneath the surface or how market dynamics may impact the firm or its key customers. For this reason, Torghatten Capital sees no reason to engage in such investments.

Let’s list some sectors that aren’t interesting either for the same rationale as explained above, namely poor value creation over the long term

1# Energy (Oil, Shipping, Gas, etc.), Other Commodities, and Banks
These sectors generally lack attractive long-term fundamentals and rarely perform well across a full business cycle. Why? Simply because there’s rarely any moat and thus the profitability over the long run tends to be weak for such industries. The only exceptions here are asset managers, insurance businesses, and equity certificate banks in Norway.

2# Semiconductors
Currently under review. The sector is highly complex and prone to boom-and-bust cycles, as Chip War by Chris Miller illustrates well. The only expectations here are the picks and shovels—companies that provide the critical tools and infrastructure enabling the industry. Think ASML, TSMC, Applied Materials, Lam Research, KLA, Synopsys, and Cadence Design Systems. These firms don’t just ride the cycle, they make it possible.

3# Businesses with High Terminal Value Risk
These are firms that have the potential to generate enormous shareholder value, but investing in them is ultimately a speculative bet. A common pattern among such companies includes target prices significantly above the current stock price, a history of strong price appreciation, and widespread excitement surrounding them. Experience has shown that the terminal value is extremely sensitive to changes in interest rates and it’s very difficult to have a firm opinion and/or confidence in a firm where everyone believes that the future is extremely bright.

Torghatten Capital has historically struggled to assess risk in these cases, with several notable examples:

• Opera Software – Misjudged the business outlook entirely and the rumors that stated that Google would acquire them. Massive failure, but early in in the investment career

• EMGS – Lacked industry knowledge (and pretty much all knowledge about investing)

• Kambi – Underestimated its reliance on the U.S. market and failed to understand the business model (was lazy and didn’t check key customer dependency)

• Elkem – Did not fully grasp the operational risks (didn’t have a clue)

• Alibaba – Misjudged the risks, lacked understanding of the Chinese market, and had little insight into the business beyond its perceived cheap valuation and general awareness of the founder (looked at the 360+ annual report and thought “there’s no way I’m reading this and definitely no way I can make sure these formalities even matter. Out”)

Principle 3 - Winners keep on winning

The third principle is that some firms simply keep winning even over decades and those are the ones you should partner with. Additionally, some numbers truly tell most of what a Quality investor needs to hear. The following is a list of things that Torghatten Capital likes to focus on when investing in stocks:

1# The preferred business models:
Torghatten Capital favors serial acquirers, investment companies, dominant technology firms, businesses in stable, established industries that provide essential consumer services/products, high-end luxury firms, and firms that dominate their niche. Common attributes here are pricing power, boring operations, long-term mindset with a focus on compounding free cash flow per share, and some with negative net working capital.

2# High profitability matters
High gross and operating margins over the long term above 50% and 20% not only provide a cushion during economic downturns but are also direct proof that they firm is operating with a moat and has pricing power. Further, a high return on capital employed (above 15% is required but ideally 20-30% range) means that the firm is generating value.

3# Competitive advantage (Moat):
All firms should possess pricing power due to moats such as switching costs or network effects. Financial metrics tell the story here.

4# Predictability & financial health
The business must be easy to forecast over the long term and operate with consistent free cash flow generation as well as revenue and earnings stability. The firms should not operate with a high debt level and preferably net debt to EBITDA should be below 4x

5# Masters in capital allocation:
The firms should show a strong track record of prudent capital allocation, whether through reinvestment, M&A, buybacks, or dividends.

6# Shareholder Alignment & Incentives:
Management should preferably have skin in the game, ensuring long-term alignment with shareholders.

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Part II - Yearly Review

Performance

2024 turned out to be a strong year for Torghatten Capital, gaining 35.2%. The 10-year performance nearly broke the 15% compounded annual mark but fell just short. From 2015 to 2024, the annual performance has been 14.8% per year, a solid result, but at the same time, I don’t find it fair to celebrate when taking the broader performance into account. Looking at the global index (as measured by the fund KLP AksjeGlobal P, adjusted for NOK), one can note that its return was 32.6% in 2024, with a 10-year return of 14.5%, compared to the S&P 500's 23% gain in 2024 and 12.2% annualized since 2015.

You won’t see this type of comparison among most investors, which raises the question. Why? Why inflate performance when the global market, which operates with significantly less risk than a concentrated portfolio, performs so well? Incentives naturally play a role here. The reality is that most fund managers aren’t primarily focused on delivering solid long-term returns but rather on growing assets under management (AUM) because that’s what drives their revenue.

I’d rather be overly strict than overly generous in assessing performance. However, if one looks at the past 7 years (from 2018 onward), the annual return is 20.03%, compared to 15.59% for the global index. That’s a cumulative return of 259% versus 173% from 2018-2024 versus the global index.

Additionally, my portfolio hasn’t been 100% USD-based. The allocation has been roughly:

• 30% U.S.

• 27% Canada

• 30% Sweden

• 15% Norway

Comparing 2018 instead of 2015 makes sense since I truly began implementing a quality investing strategy around 2018. Before that, my focus was primarily on dividend and dividend-growth investments. That strategy isn’t bad, but would I conclude that it’s not a strategy for optimizing total return over the long run (total return is the sum of earnings growth and dividend yield).

Most of the dividend growth stocks compound their earnings per share (EPS) at a lower rate than high-quality compounders and eps growth / intrinsic value growth isn’t taxable (before selling that is) as opposed to dividends being regularly paid out. You must also question why the company chooses to pay out dividends instead of reinvesting the cash. Can’t they generate better returns for shareholders internally? All in all, dividend growth investment is a good strategy, but not the best for compounding capital at the highest return possible.

Nonetheless, benchmarking against the toughest possible opponent, the global index, seems reasonable. If one could achieve equal performance while spending time on leisure activities instead, choosing active investing wouldn’t be rational.

However, that’s if you only care about capital appreciation. If you’re genuinely interested in stocks and see it as an exciting life-long hobby, then there are multiple rewards to be earned:

Benefits of Investing

Firstly it's about the insights into psychology and corporate behavior where you learn about behavioral psychology, and become more observant about how people react to crises, how they assess different products, and what makes a company strong or weak.

Secondly, which is the main advantage, is that it fosters a habit of continuous learning where you constantly seek to understand more about the world, what drives value creation, and most importantly, how to reflect on your strengths and weaknesses as a person.

That’s the real benefit of long-term investing. You cannot succeed without performing continued introspection, and figuring out how you can be the best version of yourself, which benefits all areas of your life. To hit the point home, let’s talk about the concept of discipline.

Discipline

Discipline is extremely important for any investor to understand because what matters in investing is two things: 1) You have to make sure that you avoid mistakes and 2) You have to make sure you survive. You probably heard about the legendary race car driver Rick Mears who said “To finish first, you must first finish". What he meant was that consistency, reliability, and avoiding unnecessary risk are key to ensuring longevity which again is the only way one can benefit from compounding as time here is the secret ingredient.

Over the years I’ve come to believe that avoiding mistakes is not about being strict and that people who don’t make many mistakes are some kind of superhumans. What I believe they are though is aware of the fact that discipline isn’t about not acting in a specific scenario one way or another, but it’s about ensuring that you don’t have to make that call at all.

People who are disciplined don’t put themselves into situations where they have to rely on their emotional capability to make the right call. They prepare, plan, and try to avoid such situations altogether because they know that they can’t rely on their instincts to act most beneficially.

For an investor, that means that discipline is about ensuring that you have/do:

1. A sound & simple strategy based on common sense

2. Know what you own

3. Don’t use leverage

4. Follow the principle of Occam's Razor (few assumptions beats many assumptions)

5. Don’t try to get rich quickly by following what’s popular at the moment

6. Ensure that you don’t act when you’re not at your best. That could be because you haven't slept well, are hungry, in need of dopamine, or emotionally unstable, which we all are at times.

If you control these things then you also be “disciplined”.

Now, over to some comments about 2024 and the portfolio holdings.

2024 and portfolio comments

One of my favorite things to do when reviewing a year is to head over to Google and adjust the search filter so that you can only find articles written within that year. Add the term prediction to the search and you’re in for a treat. It’s safe to say that 2024 turned out to be a much better year than what most predicted. The median year-end 2024 forecast for the S&P 500 was 5,068, which implied roughly a 6 percent gain for 2024 according to FactSet. Fun article to look back at here if you want to look at some predictions from Wall Street.

In general, 2024 wasn’t that noteworthy to comment on in terms of turbulence. AI drove a lot of the performance along with the magnificent seven and small caps continued to lag. For Quality investors, the main takeaway was probably that it was once again best to sit on your hands, try to avoid interrupting the power of compounding, and not get caught chasing what could work for what already works.

2024 was a great year for the portfolio holdings

Note: I will use charts from Finchat in the portfolio holdings discussion. I’ve tried pretty much all services and find Finchat to be the best due to their “Segments and KPI” charting option. That alone is a reason to use the service and I highly recommend it. Feel free to use my affiliate account to grab a 15% discount here

Visa (29,1% weight) experienced for a while a storm due to regulatory noise and while I must admit that the prosecutors wrote a very solid piece of research, in the end, I didn’t find many solutions in the paper as an alternative to Visa. That part was pretty weak and there was no chance that a major disruption could happen shortly. When one took the stock price fall into account and compared it to the size of a potential fine, it was pretty clear that the correction was overdone.

In my opinion, Visa continues to be one of the best businesses in the world with extremely solid fundamentals along with solid growth. The case is pretty simple if you ask me: The firm is operating with ROCE at 31%, gross margins at 69%, and free cash flow margins at 27%, and is expected to grow its earnings per share over the long run at 13% annually. The driver? There’s still way too much cash being used in the world and we are nowhere close to having reached maturity in the digital payment sphere.

Feel free to use my affiliate account to grab a 15% discount here

Another holding that is firing on all cylinders is the Canadian vertical market software acquirer Constellation Software. What I admire so much about this company and the best serial acquirers is that they do very complicated things so well, and they do it over time.

Many people have written in long format about this firm and that’s not something I’m going to do here. However, what I want to highlight are 3 things that hit the best serial acquire broadly:

1. Decentralization is a term often used and people say “they are decentralized” without actually explaining what it means in an operational setting. My understanding of this is that the company units are themselves responsible for creating objectives and key measurements based on what they believe they are capable of achieving. How they achieve this is up to them, but they have to report their progress and their achievements. This again is tracked by senior management to ensure that the business is moving in the right direction and that hiccups and best practices can be utilized efficiently.

The opposite methodology here is that senior management decides which margin the unit should achieve and then just monitors performance periodically. The reason this way often fails is because of the single thing that Charlie Munger repeated over and over “Show me the incentive and I will show you the outcome”.

Without ownership and meaning, it’s hard for large companies to ensure that units perform as they want. Accountability and ownership are the core of decentralization in my opinion.

“In 2003, we instituted a program to forecast and track many of the larger Initiatives that were embedded in our Core businesses (we define Initiatives as significant Research & Development and Sales and Marketing projects). Our Operating Groups responded by increasing the amount of investment that they categorized as Initiatives (e.g. a 3 fold increase in 2005, and almost another 50% increase during 2006). Initially the associated Organic Revenue growth was strong. Several of the Initiatives became very successful. Others languished, and many of the worst Initiatives were terminated before they consumed significant amounts of capital. Examined on a portfolio basis (and to do that we still have to use forecasts, as payback in our business generally requires a 5-7 year time frame) we believe that our Initiatives have generated reasonable internal rates of return. However the Initiative returns have not been as attractive as those generated by our acquisitions. Accordingly, many of our Operating Groups have shifted more of their efforts to growth by acquisition, and have launched increasingly fewer new Initiatives over the last couple of years.

The response of our Operating Groups is what you’d like to see: Now that they have tools for tracking Initiative IRR’s, they are optimizing capital allocation by pursuing better returns in the acquisition market. In principle, there is nothing wrong with this shift. In practice, dramatically fewer Initiatives could eventually lead to a loss of market share. The software business has significant economies of scale, so conceding market share to well run competitors could lead to deteriorating economics. I’m not yet worried about our declining investment in Initiatives because I believe that it will be self-correcting. As we make fewer investments in new Initiatives, I’m confident that our remaining Initiatives will be the pick of the litter, and that they are likely to generate better returns. That will, in turn, encourage the Operating Groups to increase their investment in Initiatives. This cycle will take a while to play out, so I do not expect to see increased new Initiative investment for several quarters or even years” - Constellation Software, Q1 2007

2. The best serial acquirers are masters of post-merger integration. This means they don’t just acquire a company and let it operate in isolation but rather integrate it in a way that ensures routines quickly take hold and the new company becomes more efficient. They understand that value from an acquisition comes not just from owning the company but from making sure it works smoothly within the existing structure and that they do so fast.

What often happens in acquisitions is that a company is brought in, but the integration process is fragmented. Routine documents end up scattered across multiple SharePoint sites and often without clear owners. Employees are left unsure about what constitutes actual company policy, both at a high level and within their specific units.

The outcome here is that without a clear structure, it becomes difficult to understand how the unit’s objectives align with the broader goals of the company. When this happens, inefficiencies arise, and instead of benefiting from the acquisition, the company struggles with confusion, operational slowdowns, and a lack of “best practices”. They are acquired and might share the same name, but they are not operating as “one company”.

The best acquirers avoid this by having a well-defined integration process that ensures new teams and systems are smoothly incorporated, making sure that routines, policies, and goals are clear from the start. Further, they are godlike in terms of operational efficiency and ensuring value realization post-integration.

3. Lastly, the best serial acquirers are masters of capital allocation, measured in terms of return on invested capital and they focus on the right things: Increasing the free cash flow to its owners over the long run.

“Our favourite single metric for measuring shareholder returns combines profitability and growth (ROIC + Organic Net Revenue growth)” - Constellation Software

“We keenly monitor our ability to put our shareholders’ Invested Capital to work. In practice, the way we actually measure this is on a project by project basis using conventional after tax internal rates of return (IRR’s). Periodically our board sets a hurdle rate, and we filter both prospective organic growth opportunities and acquisitions based upon those hurdle rates. IRR’s are complex, future oriented, require judgement, and at any one time I’d estimate that we are tracking between 50 and 100 individual projects.” - Constellation Software, Q3 2006

“Our ROIC has bounced around between 15% and 22% (annualised) during the last 7 quarters, with arguably a slight upward trend. In and of itself, that is pretty good. However, there is a unique “kicker” to our business: We use very little capital to grow our business organically. Most of our businesses actually operate with negative tangible net assets. This means that as we grow organically, those businesses consume little or no incremental capital, and may even produce capital in excess of earnings. Unfortunately, organic growth isn’t entirely free. We have to invest money in research and development, sales and marketing, etc. to get this growth. These expense items all depress Adjusted Net Income. The logical consequence, is that to get organic growth, we are willing to accept a lower ROIC” - Constellation Software Q3 2006

This point is short because it’s clear: they have a strong understanding of what the right price is and, just as importantly, when to walk away, even if they have already spent considerable time on the process.

What makes them different from others is that they don’t let sunk costs dictate their decisions. Many companies push forward with acquisitions simply because they’ve already put in too much effort to back out. The best acquirers don’t fall into that trap. They know that no matter how much work has gone into evaluating a deal if the numbers don’t make sense, the right move is to stop. They are strict enough to make that call, even when emotions or external pressure might push them to close anyway.

I believe that the key reason they manage this so well is that they are highly aware of anchoring bias. When companies enter negotiations, there’s often an initial price or valuation that sticks in people’s heads, making it harder to adjust expectations later. Lesser acquirers get stuck on that first number and justify a bad deal just because they’ve already committed mentally (or they randomly pay a price without sticking to a best practice policy). I assume that the best serial acquirers don’t let that happen. They actively work against anchoring bias, staying disciplined and objective, no matter how far along in the process they are.

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Other comments about 2024

• In 2024, I sold $AOJ because I found the management's Q&A responses too vague. If there's one thing I can’t stand, it’s when management fails to clearly articulate their decisions and resorts to endless “and and and” reasoning. To me, that signals a lack of focus. I lost conviction, took my gains, and moved on, reallocating the cash to Visa and Constellation Software.

• I also sold Lifco after holding it for several years, as I found the valuation excessive. At 337 SEK, I estimated the forward annual return to be around 6%, which wasn’t compelling enough. The proceeds were moved into Visa.

• Additionally, I took a quick profit on $UNH after buying around $450 and selling in the $550–620 range, again reallocating the cash to Visa.

• Lastly, I trimmed my position in Investor AB to free up capital for Visa when it was trading at $272.

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Portfolio 2025

The weighted portfolio KPIs look like this as of now (9th of February 2025)

Predictions going forward

Visa, Constellation Software, ATD, Novo, Atlas Copco, Investor AB, and Bouvet are all performing well and I don’t see much reason to be pessimistic here. They simply continue to compound at a decent pace and deliver great reports periodically. None of them appear to be overvalued either and I expect most of them to return around 10% annually from here based on the current stock price.

Medistim is a fantastic company, but growth has slowed down and that will be the main thing to focus on going forward in 2025 as they continue to innovate and expand their new product MiraQ™ INTUI Software Platform.

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Evolution is naturally a stock I’ve been paying close attention to lately. There’s been a lot of noise, and both investors and analysts are growing concerned that the company’s moat is weakening, with EBITDA margins and growth either slowing or stalling. Right now, I’m focusing on the fundamentals and the potential for growth in Asia.

According to the CEO, growth could normalize by 2025 if the cyberattack issues are resolved. However, it will likely take a few quarters before the company's countermeasures start to show results.

When asked by an analyst, “Does that still mean you expect improvements this year?” EVO responded: “Yes. The underlying market is intact and looking good. And I have no other flavor to give you. So 100% focus is the cyber attack, that someone is stealing our product.”

2025 will be a defining year for value investors in Evolution, either they’ll be very right or very wrong.

My view is that the numbers are simply too attractive to ignore, and it feels like emotions are currently driving the narrative. I wouldn’t be surprised if I ended up buying more in 2025.

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Part III - Principles of Life

If you’re reading this annual letter I suspect that you’re a driven and ambitious individual with a growth mindset. While that will likely ensure that you succeed in the professional world, the external part which everyone keeps tracking, might not mean you have a good understanding of how to think and feel about your progress.

So, here are a few thoughts that I’ve benefited from and continuously tried to think. This section of the annual letter will grow as the years pass.

1. A valuable lesson to learn early in life is that your daily mood is closely linked to the quality of your sleep. When you’re not feeling your best, instead of overanalyzing, simply recognize that your feelings may be due to a lack of sleep & leave it at that. It has helped me
   

2. You can't find happiness as an end goal and stay there continuously as it's not a static position but rather a dynamic position about something else. The Swedish bestselling author Astrid Lindgren used to say that you need to experience sorrow to feel happiness
   

3. I think being happy every day is an illusion & something we've been told is correct. If you can be reasonably happy for the majority of the year, you're doing well. Even Nicolai Tangen said that if you're happy 51% of the year, that's great. Happiness isn't a constant state that we can be in.
   

4. It's a dangerous thing to become obsessed with alternative costs & compounding
   

5. Try to compound everything in life, not just money, but do so with focus. A mistake I’ve made previously is to try to compound many things at the same time. Choose 1-2 things per year and keep tracking those. Forget about the result. Just focus on the input and the output will take care of itself. You can only improve what you measure
   

6. "Watch your thoughts, they become your words; watch your words, they become your actions; watch your actions, they become your habits; watch your habits, they become your character; watch your character, it becomes your destiny." ― Lao Tzu
   

7. “What many people see as a three-hundred-page book is often the accumulation of thousands of hours and decades of work. Where else can you get the entire life's work of someone in the space of a few hours? - Charlie Munger
   

8. “The true scarce commodity of the near future will be human attention” - Satya Nadella
   

9. «I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you» - Charlie Munger
   

10. “The more you read, the more you build your mental repertoire. Incrementally, the knowledge you add to your stockpile will grow over time as it combines with everything new you put in there. This is compounding in action, and it works with knowledge in much the same way as it does with interest” - Gautam Raid
    

11. Michael Jordan once said, "I've missed more than nine thousand shots in my career. I've lost almost three hundred games. Twenty-six times, I've been trusted to take the game-winning shot and missed. I've failed over and over and over again in my life. And that is why I succeed."
    

12. “Having a strong passion for lifelong learning is a durable competitive advantage for an investor. What differentiates successful investors from mediocre ones is passion. To be a truly passionate investor means you are always thinking about the future and the direction of the world. It means you are always enthusiastically observing everything around you. Investing isn't just a process of wealth creation; it is a source of great happiness and sheer intellectual delight for the truly passionate investor” - Gautam Raid
    

13. “We are what we repeatedly do. Excellence, then, is not an act, but a habit.” - Will Durant
    

14. “If you are in the luckiest 1 percent of humanity, you owe it to the rest of humanity to think about the other 99 percent”. - Warren Buffett
    

15. The more decisions you make, the less willpower you have. It's called decision fatigue. Focus on making fewer and better decisions. This allows you sufficient time to think about each decision deeply and reduces the chances of making a mistake.
    

16. “The old also have the advantage of knowing which advantages they have. The young often have them without realizing it. The biggest is probably time. The young have no idea how rich they are in time” - Paul Graham
    

17. “What should you do if you're young and ambitious but don't know what to work on? What you should not do is drift along passively, assuming the problem will solve itself. You need to take action. But there is no systematic procedure you can follow. When you read biographies of people who've done great work, it's remarkable how much luck is involved. They discover what to work on as a result of a chance meeting, or by reading a book they happen to pick up. So you need to make yourself a big target for luck, and the way to do that is to be curious. Try lots of things, meet lots of people, read lots of books, ask lots of questions” - Paul Graham
    
    

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.

1. Knowledge is overrated. Wisdom is underrated. 

2. Intellect is overrated. Temperament is underrated. 

3. The outcome is overrated. The process is underrated. 

4. Short-term outperformance is overrated. Long-term adherence to one’s investment philosophy is underrated. 

5. Gross return is overrated. Stress-adjusted return is underrated. 

6. Upside potential is overrated. Downside protection is underrated. 

7. The maximization of returns is overrated. Avoidance of ruin is underrated. 

8. Growth is overrated. Longevity is underrated. 

9. Entry multiple is overrated. Exit multiple is underrated. 

10. The Price-to-earnings ratio is overrated. The duration of the competitive advantage period is underrated. 

11. Categorization of stocks into large-cap, mid-cap, and small-cap is overrated. The categorization of businesses into great, good, and gruesome is underrated. 

12. Being more frequently right than others is overrated. Being less wrong than others is underrated. 

13. Forecasting is overrated. Preparation is underrated. 

14. Confidence is overrated. Humility is underrated. 

15. Conviction is overrated. Pragmatism is underrated. 

16. Complexity is overrated. Simplicity is underrated. 

17. Analytical ability is overrated. Personal behavior is underrated.

18. Having a high income level is overrated. Inculcating a disciplined saving habit is underrated. 

19. Competition with peers is overrated. Helping our peers is underrated. 

20. Their large personal net worth is overrated. Good karma is underrated. 

21. Talent is overrated. Resilience is underrated. 

22. Being the best investor is overrated. Being the most authentic version of you is underrated.

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!

“I will admit this: I have been in the “chill the fuck out” crowd for the last few weeks. But now that there is a decent chance that my family has COVID19, my perspective has changed a bit. And so will my actions. I won’t be alone on this shift” @Uncle Rico

I wouldn’t be surprised if we see even more volatility in the stock market in the coming weeks as Americans move from a rational and distanced mindset to becoming more emotional and fearful.

Yet, the fact is that we know little about the true effects on the stock market of a pandemic, as shown in Fidelity's paper on the effect on the stock market on past pandemics.

They even conclude that:

“We cannot draw any fixed conclusions about the effects of pandemics upon stock-market performance. Equity markets react unpredictably to the unknown; nevertheless, such events should not be examined in isolation but viewed in common with other prevailing market conditions. In investment terms, it is hard to mitigate the effects of events such as pandemics or war. At such times, investors should remember the benefits of long-term investing, as demonstrated in the following chart of the S&P 500 Index”

What they're saying is that over the long-term, as you can also see in the graph below, is that there is still no reason to believe that equities as an asset class will stop rising. Yes, tourism will temporarily to a degree stop, schools will cancel their graduation parties (my brother-in-law in Japan, unfortunately, experienced this), oil prices will fluctuate and the healthcare system will once again be tested. But, even though it might seem so right now, the world is not going to end this time either. Within a few years, this too will go in the books of history and we shall worry about a new problem.

And that's the nature of investing. You have to be able to deal with the unknown and sticking through it. That's the rule of the game.

The whole reason stocks tend to do well over time is because they make you put up with stuff like this. Cost of admission, feature not a bug @Morganhousel

The key to dealing with events such as this, if you want to be a rational long-term investor, is to stop trying to sound smart and informed. I know it sounds weird, but you are not doing yourself a favor by acting as a medical expert while sitting in your underwear and tweeting insane statistics.

You simply need to deeply accept that you don’t know the outcome of this event, as no one ever has in times of turbulence, and that’s best to accept volatility and move on with your daily life.

What we don’t know outweighs what we do know at this time. We aren’t going to look into the crystal ball that none of us have.” CEO of GE

Aker Capital wrote a fantastic piece about staying passive called the art of not selling which profoundly resonates with me.

We try hard to tune out concerns about politics and the economy. We read the newspapers, and we work just down the road from Washington D.C. However, it has been our experience that we are at our worst as investors when we allow concerns about these issues, including elections, trade wars, and Fed policy, to influence our investment decisions.

It took me about 9 years in the equity market before I understood that news and market -commentators don’t want the best for you. They want to play you, to find your weak spots such as fear and greed until you need them to feel informed enough to have an opinion.

Moreover, whom are they do tell investors what to do? Until I’m proven otherwise, my standpoint is that wise investors don’t tell others what to do with their money, but rather accept that they are not equipped with an answer at all times.

Knowing what you don't know is more useful than being brilliant - Charlie Munger

It might seem like there's much value in talking macroeconomics, but as I talk to more and more top-performing asset managers with a long-term horizon about this topic, I see that the best investors don't care too much about macro events.

Why? Because there will always be a reason to sell if you extrapolate current news and try to create a bearish scenario.

Just look at the graph below. Surely, at all of these times, it would have felt like you needed to act. Something needed to be done.

Yet, when we have the facts, all you needed to do was to sit tight and believe in your conviction (which I'm assuming is grounded in analytical work where your investments, what they do, their pipeline, etc).

Assiduity is the ability to sit on your ass and do nothing until a great opportunity presents itself - Charlie Munger

Do great opportunities present themselves?

As I do my analytical work, using DCFs, multiple valuations with P/E, P/B, EV/EBITDA, and the yield theory, I find that most holdings that I find interesting are now trading at a 0.95 - 1.10 in price/fair value. As such, many of the high-quality firms I aim to own and add to over time are now fairly priced, but they are in no sense a bargain as news portrays.

When the market is truly a buy, you won't want to buy it! @biancoresearch

That does not mean that I'm not going to buy equities. I will. But nothing more than what I normally do. In pieces, as we go down.

With that note, let's end with a trick to skip the CFA exam and yet make tons of money in the stock market.

The golden rule of investing goes as follows:

When assessing if the market is a screaming buy or not, listen to those around you. When people without any interest in teh market starts talking about the market, you'd better start buying with both hands.

Most likely, we will hear more frightful news in the coming weeks. Try then to remember the famous words of Mark Twain

It is better to keep your mouth closed and let people think you are a fool than to open it and remove all doubt.