I suppose I’m that kind of value and quality hunter. I’ve certainly listened to the hype in my time and jumped on many a “good story.” Nowadays, I try to ignore the forum buzz entirely. Investing books say to follow those better than you. I try to be critical of those as well; the media is full of “gurus” whose success doesn’t necessarily hold up when compared to the index. Furthermore, it’s quite bewildering how often getting rich is a matter of one big success.
In Saario’s book mentioned in the opening, it says to put your long-term investments in market leaders. Another point that stuck with me is that the ROE of investments should ideally be over 12%. If the long-term return on stocks is about 8% and inflation on top of that is 2%, then with an ROE below 10%, it’s difficult to beat the index in the long run. This relates to Hex (Helsinki Stock Exchange) in that a large portion of companies find it difficult to reach that 12% ROE. A 12% ROE (RAE in the original) provides a small margin of safety downwards, but moving upwards requires a clear change in business operations. Even if a stock is cheap, you should be able to say why the ROE will rise higher in the future. I have owned the mentioned Fortum on a few occasions. Very rarely does its ROE exceed 12%, and usually, it slips back below. Now it’s negative on an annual level. Fortum is a difficult case. It clearly has moats protecting it and good productive assets in hydropower and nuclear power, which do not produce CO2 emissions. Warren Buffett talks about management. Fortum sold its power grids to Caruna, which I think was a mistake. Investing the money further into Russia and Germany were mistakes. Management has made three mega-scale mistakes in a short period. Why wouldn’t it make the same mega-mistakes in the future? The State, as an owner and in leadership, also has experience with “buying air” from Germany (Telia). In America, the State isn’t considered a very good owner, and there seems to be a lot of truth to that. Well, once you weed out the State, the options become quite a bit fewer. I believe Kim Lindström researched that 20% of Hex companies perform well at all times, meaning also in weaker market conditions. From this, one can conclude that there are quite few companies in Hex worth investing in, and even considering valuations, the opportunities are quite sparse.
I am a fairly cautious investor and I try to select those companies that perform well in all conditions for my portfolio, so as not to take such a big hit to the compound interest effect during economically weaker times. I immediately reject domestic capital-intensive companies due to poor ROE. ROE only rises in good market conditions. Evidence of “adventures” and poor acquisitions in America can be found with Stora Enso, for instance.
In some cases, I’ve ended up following certain investors. However, they have long-term track records of beating the index, such as Buffett and the Wallenbergs. Ultimately, I’ve concluded it’s smarter to buy their companies directly than to mimic their moves. Investor AB works on developing companies in ways I can’t influence, nor could I even buy all their holdings. Additionally, they gain a tax advantage and have experts to minimize taxation. For example, there’s no point in me filling out forms for the Swiss tax authorities to get ABB’s dividend taxes back. I buy Investor directly and their staff handles it. There’s a thread on the forum about investment companies; who knows, maybe I’m a buyer of “brother stocks”?
I have owned it myself, but not the forum members back then…
