Good Investing Talks - What are your lessons for compounding in the Nordics, Daniel Glaser?

Episode Date: February 13, 2021

Daniel Glaser of River Oak Capital is an outstanding global investor with a strong focus on the Nordics. He walked me through his journey into investing and his approach in this talk. We also discussed his investment in Fortnox.

Hello, Daniel. It's nice to have you on today. You're coming from Sweden. You're located in Uppsala. Yeah, Uppsala. Did I spell it, right? Yeah, I did. Yeah, Uppsala, Sweden. And yeah, happy to be with you, Tjelma. I hope we're having a quite interesting interview. I will start before I show the disclaimer on the message from our sponsor with Tinku it is today. with a small question where I ask you or I want to imagine you that you're at a speed dating where on the one table there is a company you want to invest in and you have 30 seconds to say hello

and who you are and this company you can think about investing long term and staying in a relationship with them on the next table you will meet an investor you think that might be quite interesting for your stock or fund we will get later to this and you have 30 seconds and I will invite you to start saying hello to the company you invested in and and if the 30 seconds are over I will let the death star play we're doing 30 seconds with the company and I'm 30 with the investor okay so let's start with the company yeah Yeah, hello. We are an investment company, which we run our own money. So we are going to be with you long term. We are always interested in what your plans are over the next two to five years. And we will be helpful in any way we can. And yeah, also, you might be. looks now you're at the investor yeah so to investors we're speeding yeah sorry um you know it's

very unlikely that we will maintain our returns so far uh we are very likely to at some point have a big drop um top to bottom uh that said me and my family have all our liquid network invested in this company and in the same strategy. Thank you. You have done the Death Start test very well. And I want to give you some time to relax because it was kind of a challenge. It was a tough starting question. Yeah.

And start with the disclaimer and our sponsor message. Here we go. As always, here is the disclaimer. You will find it also linked below. It says, do your own work. All we are doing here is a quality. doing here is a qualified and hopefully fun talk. But it's no advice and no recommendation, always do your own work. And I also want to drop the message of our sponsor here. It's

Mitimko. Mitimco is supporting this episode. Metimco manages the financial assets of MIT through partnerships for talent investment managers all over the world. Mitimco is eager to connect with emerging fund managers, they invest alongside young and unconventional investment firms and bringing resources and the creative perspective to the fund managed and journey. Whether you're a one-person job just getting started or a team of investors building something unconventional, Netinco would love to hear from you. No firm is too small, to early or to uninstitutional. You can drop them a line at partner at matimco.org, partner at mitymco.org and visit their site

Mitinco.com emerging managers. The ones who are watching this video on YouTube already see the site. And I also will link it below and the show notes of the podcast as well. So you can easily reach out to them and say hello. So thank you. Daniel, I hope you had time to relax.

And maybe let's start with your background. Who are these guys behind you on the wall or there's also a woman? and why do they inspire you? Yeah, there's two women. They might not have so much to do with my background, actually. But yeah, it was a fun thing to have some good company here. And I think what all of these people behind have done is they have really gone their own way.

They are very thoughtful, all of them. And, yeah, I guess most of them are geniuses, too, in their own ways. So, yeah, you might see the two women might be interesting to lift out. So one is Jacinda Arden, the prime minister of New Zealand, so a very young one. And there's also J.K. Rowling, so the one that wrote the books about Harry Potter. she she came from like almost nothing like I think she said she was as poor as one can be without being homeless and you know was writing the books and yeah the rest is history I guess so yeah but in terms of my background you know 12 years ago I I did not know

anything about investing so I didn't know what a balance sheet was I didn't know essentially what revenue was I had a basic understanding that companies sold things they had a cost of doing that and you know then they turn out turn out profit that's about the extent of it so the books help you to get a deeper understanding of investing oh a lot I think it's it interesting to understand where I come from. So my background is in engineering physics with a specialization in optimization, so mathematics really. So at the end there, I was optimizing cancer treatment for radiation, radiation treatment for cancer patients, sorry. And also in

elite sports. So I have been in the national, Swedish national team playing badminton for probably 12 or 13 years before that. So when I had my first, you know, bout into investing, I, I've always liked to walk around in libraries. So when we would go abroad with my family, we would go, you know, they would want to see, I don't know, mom and dad will probably want to see, you know, do some sightseeing, see some important monuments. And I'd be much happier to go to the libraries. I was like, yeah, okay, let's let's go buy a bookstore. And so about 2008 or so with no idea about the financial crisis, by the way, I was walking around the bookstore and I sort of wanted to, I didn't really know what to do with my life, to be honest with you.

And it was this book that said, you know, the business of life. So Snowball, the Alice Shredder book about Buffett. So I picked that up. and I didn't think too highly of the financial industry at that time. And in this book, it was like, you know, you can really do good in this industry. And it really clicked with me. And this was somewhere around 2008, I'm not sure. For some reason, I put the book down. I felt it was

it really clicked. I put the book down and I can't tell you what I did for two years probably. I didn't do anything investment related. I met my wife, so maybe that was it

why I never really I was newly in love and all that. So maybe that was it. But a few years later, a friend of mine came to me and he said, yeah, you're good with math.

Why don't you help me look at this company and it was a situation where company a was owning shares in company b basically company b's shares had gone up a lot and uh so they were actually worth more than company a's total market cap at the time and i was like you know this is exactly what i read about in in snowball security analysis and so on and uh yeah so i went home did did the work and we ended up investing and say within five six months it had worked out so it was really i was like this can be done and um um um from then on i i sort of started dabbling you know doing all kinds of mistakes you can do i think um than many of us do when we start out and uh about um what was your favorite

mistake where you think oh there are many uh it's it's so much worth this mistake that i really like i did it yeah like i i can't point to one which was like extremely costly but i can point to one which was so extremely embarrassing now afterwards so it was uh it was actually an actual coal mine in mongolia i think they had this you know uh you know good salesman as a ceo i think and it was uh it's hard to think of something worse, like when you think about it. I was like one of the first. I like, you know, these classic things like biotech, like things, you know, which are hot.

So, so I did many of those mistakes, but for some reason during those very first years, I also did a few good things. And I realized, you know, when we summed up the year, I realized that so one, perhaps the investment i was most confident in it had actually done really well you know it will it could be up 50 percent but most of the others were so poor so we were basically break even so those initial three years i remember them pretty well because at the end of three years i think we were up about three or four percent so about about zero point eight compounded or so and that was that was good because considering how little I knew and how bad I was, that was a gift, like a free education

basically. So I probably deserved to lose a lot more than we actually did. But anyways, I think that one of the key moments there was in 2013. So during these years, when I started looking for for ways that would work, one, I had. all these you know you're looking at some studies you're you're reading all kinds of things and there was this one study that was very um attractive to me and i felt you know now maybe i have it and uh i realized that that a study so the study was something about uh investing in in stocks that would be included in an index or so something like that i don't remember the details but basically when you peeled on in a little bit you you realized that

that that was only an effect of the financial crisis. So you realized the study was basically flawed. And it was sort of my final hope to find something that would work. And after I realized that that was completely not worth anything as well, I went back to this sort of boring portfolio that I was already managing. And I said, you know, let's try to aim for 15% a year. And so that was the key thing, I think, that I sort of came to peace with that there are no shortcuts. You know, you just have to do the work.

You have to understand more and more. And hopefully, you know, you'll do well doing it. It's interesting that you're saying that there are no shortcuts. Where did you also, are there other topics where you had to learn to go the long way as well in your journey? any into investing? I mean, elite sports is pretty much the same. Like, yeah, you know, at the end of the day, the one that remains, I mean, the ones you see, you know, winning tournaments, winning championships are usually the ones that

that stay the course, right? So there is always like, 10.000. 15 years probably behind every championship behind every so that was certainly one point but I don't know I came in with this I think beginner's mind and I figured that there should be some ways to do this it sort of feels like there are maybe not shortcuts but but you know methods and at the end of the day today I also have a method of course but it's really there's no like magic pill or it's really just basic work and if you do it long enough you will become a little bit better at it over time and yeah but that is a big big insight actually

I think because it's easy to try to look for all these you know technical things and and And yeah, short term thinking, really, which is doable for some, but extraordinary hard to do successfully for most, I think. With books, you have a certain chance to get quicker and with a smaller budget to the wisdom of other people. And I asked you before about your three favorite books and maybe you can show them introduced to the audience. because you have some So three favorites are really hard but

hang on a second well let me pick up this three we can also if you send me the list of the others I can also put them in the transcript

sure no problem I think this is a great one and Captain class. And this is the author here, Sam Walker. He did an enormous, enormously comprehensive study of all the best sports teams of all time and try to figure sort of the red thread between them. Seagull about a seagull that, you know, doesn't accept being ordinary, but wants

to try his or her wings, I guess. And then in terms of investing, this is one book, I don't know if you can see it it's it's the pat dorsey's little book so he um basically what it did for me because most of your viewers i think know all the classic investment books but what this one did was like it really helped me understand modes so switching costs networks if network effects and and in a completely different way than i had before and maybe in a bit modern way because Many of us might come from where a moat is a low-cost producer or, you know, some brand or something, but like this really will teach you a lot, I think, about switching costs and network effects aspects, which I think are the best modes a company can have, really. Interesting. I didn't have that big on my list, so it's a takeaway from this interview for sure to look at. to this book.

What did you lead to found River Oak and how, yeah, what that's a question. Yeah. So I had a, I had a key decision in around 2015. So my optimization work I did in, in Florida, my supervisor there became one of my main role models, I think, in terms of my professional life. So he started a company and they listed on the NASDAQ in 2016. And so this was a bit before that, but I sort of thought like, should I go work for him? I was also working with my dad, which was another role model, of course. And I had these two role models. I had a third, I had another job, which was my actual job at

an institution, Karolinska in Stockholm, not investment related. And I did the investing on the side, basically. And so despite this, you know, I had the gym, which was one role model. I had my dad, which was another. I was like, I couldn't do anything. But what I wanted to do was invest. And, you know, it took some time to, to be okay with that, to sort of go in that direction. And I heard this great, I saw this talk with, I think it was Jeff.

Bezos and he said that you know you don't choose your passions your passions choose you and once I heard that I felt you know now I have a free line to go wherever I want right so so that was the decision I said you know I have to do what I what I love doing and yeah from from then on I I did it but basically the idea with River Oak it started it really started January 1st 2013 so it was the person you mentioned in Florida was the person who asked you about the stock where you finally invested or was this another

no no so the algorithm I wrote in as my master thesis it went into his company so it was at the start of his company so he founded this company my supervisor Vue it's called in 2006

and then it was listed in 2016 but he had been this you know we had great fun when we were building this algorithm, you know, we were having many late nights in Florida. I was there by myself, you know, feeling freedom. We were having a great time. And so he just founded the company. And I had always, like since then, I had it in my mind because he asked me to stay to work at the company, but I wanted to go back. And since then, I had always like had it in my mind. Maybe I should

go work for him. But around that time, so say, 2015, I decided to, you know, I'm going to do investing full time. And so River Oak really started in 2013. So January 1st, 2013, my mom was my first and only seed investor. You know, it was 400,000 from her and 420,000 from me. And it compounded at a decent rate. And some people just, friends started asking maybe this could be set up to do something a company of it and it took

some time but that was really the I put you know I probably put 20 people up on the list one email list so I could send them results I said 2013 you know I'm going to publish results I'm going to write about it and most of them probably went on the list but to be kind to me not because they were so interested. But that was the list that I sent in 2017. I basically said, you know, let's try to send it to these 20 people and see if anyone wants to found a company with me. And I remember sending it. And I believe that I told my wife that, you know, let's hope one is interested at least. Probably not, but we'll see. And yeah, 10 of them ended up being interested. So I had 10 co-founders at River Oaks. So I went around Uppsala and Stockholm and we all signed

the founding documents. So I went around to each and every one of them for two days there. And it was really, I think, you know, once you made a decision that you really want to do this, I could continue doing it just in the family office structure. But I felt it's something that's very, very scalable. So why not have many other people come along? What has been your decent returns in the first period before finding it as a more formal structure? Well, it was about probably it was above 30, below 40, I think. But yeah, between 30 and 40 annualized for for for those four years or so that's a good return it is yeah and how did you think about setting up the structure because you have this interesting structure you're not a fund you do capitalizes

maybe can't tell more about this and is this a special structure to sweden i'm not sure uh i think you can do similar things in another i would think it's a regular basically and everyone is a shareholder so there is no function where you have you know in a big downturn like during COVID in the start of COVID where many funds would have many huge redemptions there's no redemption function in that way you need to sell to another shareholder so yeah our capital is our capital and we can use it to be very long term to invest as we please and you know in listed companies in private companies so i just thought there was many advantages of

doing it this way there are also one or two fund structures which is is pretty uncomplicated in sweden but then you need to go to professional investors which might be difficult to start out doing so so yeah and i also thought you know it'd be fun for them to feel that they're shareholders you know so so we i have bought my shares at the same price that they have bought their shares and and uh we're co-owners and and you know they uh some of them will uh you know come with an idea from time to time and and uh becomes more of a fun social thing too uh in terms of a fun that would just have you know perhaps many people that i didn't know who they were uh so that i didn't feel really meaningful to me to do it like that in a structure you have a special fund class as a

class or yeah we have two short classes so i i have a shares so uh they have higher voting power at this point that that's the only difference right now so um yeah i want to be able to uh put in a veto if everyone wants to buy uh you know uh invest in this coal mine in mongolia or whatever it might be something that is very fashionable but but perhaps not something where i see much investment merit so and compared to the you already talked about this in your letters and i find it a very interesting point compared to the structure of investment vehicles in the nordics you just describe yourself as being different um how do you see yourself in relation to other offerings? Yeah, so I think there are quite a few really good investment companies,

a holding companies in Sweden, but they are in the billions, most of them. Like they are, you know, two billions, five billion, ten billion, a hundred billion, even with Gustav Douglas, perhaps. And so they might actually be quite similar, although I think most of them have fewer shareholders. We also have Spiltan, which is, they have a few thousand shareholders, but that would perhaps be the most similar in terms of structure. And if you compare us to the funds, we're just completely different because they have rules of not being able to have a weight higher than 8%. I don't know the rules, but it's complicated and a lot of work seems to go to a lot of time seems to go to other things than doing the actual work. I think it's just a very, very

different from A to Z, you know, we're doing everything different. We do have some similarities in that we invest in publicly listed companies, but that's about the extent of it for most of them. There are exceptions which might be more similar to us, but yeah. As I already mentioned, the Nordics I want to have the chance to ask you a bit about some insights about the Nordics and maybe I want to start with the question what people get usually wrong about the Nordics and it's one of that's the universe you're mostly investing in one one thing they get wrong about Nordics it's a bit hard for me to speak about the whole Nordics but maybe maybe they think it's Switzerland you know

Sweden many US people think Sweden is Switzerland but but in terms of I think at least you know my community I think they have a pretty decent understanding of the Nordics I think in in some cases Americans come in and they might be Americans are very ambitious while Swedes are a bit more less ambitious by nature. It's a very cultural thing too.

So they might come in and say, you know, you need to, I mean, they might have opinions about how a company should be run. And they might say, you know, let's, let's go faster. Let's do it like we do it in Silicon Valley, et cetera, et cetera. And that might not always be the best recipe for Swedish companies. I think we have a few exceptions. which are, well, we have many companies which are very ambitious, but perhaps a few famous ones like Spotify, Clorna, Isettle,

which really fit the mold when it comes to, you know, going really fast, innovating, being very ambitious and, you know, try to be world leading, basically. But so we don't have many like that and it's not something that comes natural in the sense. So I think it's just important for, for um americans when they not just americans but but generally when people come to invest in nordics you know you have to realize that uh there is cultural factors which uh might not make it suitable you know the silicon valley print my blueprint might not work everywhere for everyone you know some would argue that it's not working for some silicon valley goes company

too, I think. We only hear about the great ones that come out of there, right? So, so there are for many that it doesn't work either. But I don't know if that's something they really get wrong. I actually think most have a pretty good view and understanding of the Nordics as a generally very well-functioning part of the world. And what's the difference between the different markets and the Nordics, in your eyes, if you compare the Finnish market with the Swedish market, the language is one big difference. I mean, I think the Finnish market is less well known.

Many companies there are less well known. We are, you know, there's 10 million people in Sweden and in Norway, Denmark and Finland, there's about 5 million. So Sweden is twice the size. So it feels like the markets are more analyzed here. So I think maybe you'll be able to. find a few you know pieces of gold in in Finland or something like that it's there's a higher there might be a higher chance for it in some cases where people just don't know about it

but there are more companies I think generally in Sweden which has come a far way than for example Finland or Denmark there's no Spotify or clorna from the others that i'm aware of at least they're they're coming they're coming now though so they're it's it's a good space because it's so stable you know the the population here is stable political environment is very stable so i yeah our preferred Geographies are the Nordics and the U.S. has been historically, but we're also doing some in China and in South America. But this is the most stable and, of course, the one I know the most. So it's a huge advantage of investing on your home court as well.

In which companies or patterns are you looking in in the Nordics and your home court? Yeah, so since about five years ago, we have been almost exclusively in software companies, online-based companies. And usually what I want to see is some strong secular tailwind. So no special situations, no complicated things, no some of the parts situations, no shorting, no. leverage, nothing like that. And also, you know, areas where I think this is an underestimated thing to keep in mind, you know, areas which I find really interesting and fun. So I will say no to a company where, which I'm basically sure it's going to be a good investment, but I just don't click with it. Like I can't relate to it, for example.

So I'd say those are the most, those are the areas we have been. And it might sound, it might sound, you know, like, yeah, only software and online base. But, yes, you know, that's a pretty broad area. So there are many companies that go under that. And if you're investing in China or South America, you're losing your home court, competitive advantage. How are you going about investing there compared to the way? you approach investing in the Nordics yeah it's a great question so you just have to accept that you do have an information disadvantage when you invest in china or in south america

so i have a friend from from china a great investor and and yeah probably one of the best investors in in china there is and so so and he asked me about this and he specifically said that you know we do two three calls every day we know a lot of industry experts we know a lot of people at the companies and we still miss a lot of things and that's sort of we might have been going more and more towards china and i was expecting us to to be more in china by now but i sort of realized over the years that you know the only thing you can do there is very well-established companies, which have a broad, very broad market, a huge opportunity and you don't know, you don't need to know all the details. So, so in Brazil, for example, um, there's an

interesting situation there with, with the payments market. Um, there are two, there are a few new companies now, Stoneco, Pagsiguro and there's also a private company, new bank. And it's interesting there because in 2010, this was a duopoly basically between two large banks. So one had an exclusivity agreement with Visa. The other one had an exclusivity agreement with MasterCard. So if you wanted to pay with MasterCard, you needed to go through one of them, right? And if you wanted to pay Visa, you need to go through others.

So stores and restaurants would have two machines, right? So, you know, and I guess some of them, might have had no machine, only one machine. So if you came in with a visa card in the wrong restaurant, you might have not been able to pay, I guess. And they deregulated that. And, you know, not only was there, you know, these machines, which were, you know, you needed to have two, but also like the interest rates and the take rates were enormously high. Like, you know, I've heard 10% and, you know, there's one. One, I read a former employee at Stoneco said that, you know, I was trying to help a client find their actual take rate in the, in the dashboard, although these old incumbent large banks, and it was practically impossible.

So what Stoneco did and to some extent, Pags Agura too, I think, they came in and they said, you know we're going to be hugely transparent we're going to have a dashboard we're going to show you your taker at front and center there's no way you can sort of change that and the larger banks they were actually increasing the rates until the customer noticed and then they were like yeah sorry and then they took them down again so it was like very low-hanging fruit to come in and care a little bit about the customers and you know stone has a take rate I think just below 2% and it's founded by by you know serial entrepreneurs so so they know the pain points of with the larger banks you would

have to sit in line for like two hours three hours to to fix a simple customer support Aaron and in in what stonko did was like is we're going to try to answer it you know within minutes and they measure themselves on metrics like that. And I think when I found out about it, I think it was in 2018 or 2019, I can't really remember. They had a market share of three, four percent, perhaps. And, you know, they had, of course, nowadays, all acquirers

accept Visa, MasterCard, American Express, etc. So, and it was also at a, valuation of around 6 billion or so. And I don't need to know that much more than that. You know, they were taking market chairs hand over fist and it was very simple to understand why once you've done some work there. And it was almost impossible to see how the banks, you know, how many examples do you know of where you have the incumbents with a legacy technology with the culture.

says, you know, we're going to raise rates. We're not going to really care about the customers. They have to use us. So that would be an example where, you know, whether it's Stonko, Pagsiguro, or the opportunity is just so huge. And you need to have some model, of course, about the valuation. But I don't need to know all details there. So that would be the typical situation where.

where I'm comfortable in investing globally. So in China, for example, you know, cloud adoption. So, you know, e-commerce and sort of it's going much faster in China. And opportunity, of course, there as well is huge, huge. So there are probably a few companies related on that theme in China, which I think are investable. But of course, I'm not going to invest in. something that's, say, a billion crooner, which we might do here. So a company with a one billion market cap in the Nordics, that's fully investable.

That's probably not going to be investable in China. What role does the past play in the way you analyze companies? Because from what you told till now, it sounds you're a bit entrepreneurial investor. Yeah, we have a, I think we have a particularly soft spot for, for companies that enable entrepreneurship. Stoneco is a great example. Fort notes in Sweden is another great example of that. And so I think I personally have a soft spot, you know, after all, entrepreneurship and, you know, small and medium-sized companies, that's the ones that get our economies growing, the most part of it and they I don't remember the percentages but like it's it's probably

more than 50% of of growth and ah I shouldn't quote the numbers but but those are the drivers so and yeah with some entrepreneurial background myself I think it's natural to sort of so as I said I really want to invest in in companies where I click with their offering with their product like otherwise it's not very interesting and there are many ways to invest and make a lot of money and all kinds of companies but many are not interesting to us simply because because of that but yeah regarding the past i think you know the past for for me it's a data point so so but not much more than that and of course a good record in the past is oftentimes means a a good record in the future as well. But the key in investing, of course, is there's almost no value

in the past. Everyone can see the past. It's readily available for screeners, huge institutions, banks, they have access to loads more data than we can have. And so everything I do is completely focused on the future and preferably the you know the next two to five years that that's really the basis for all investing and of course the past is a good data point in some cases a very good data point but you know when it's obvious to everyone there's usually not much value there to be had so i think in one of your letters you said you sold amazon um because you saw you your advantage in small caps yeah you see this opportunity that there's more advantage in small caps as a rule today or did it change that you also see there's big

opportunity in large caps like amazon no i see it as a general rule that you know small small caps and the main caps are going to be much more attractive as investments now this has not always been the case for the past five years i'd say pretty surprisingly for many i i remember when apple was at you know an 800 billion market cap and and it was really hard to see them you know double that value right because you need to add one trillion of value so but it happened and and i think that's been surprising to me um i i saw their advantages I just felt that, so when we sold Amazon in 2017, and it was right after River Oak had started, I just felt that we're going to have a bigger edge in smaller companies, and we don't really need to

fight in that pit with the 10 largest companies in the world. And I, you know, I love most of them to be. be honest. I mean, Amazon is great, obviously, and they are fully investable. It just has happened that, you know, after that one, we haven't invested in the really huge ones. But it's fully open to do that. I think that should rather be regarded as a mistake than anything else, perhaps in the case of Amazon. But, you know, um, This is, we'll tend to be focused in small and midcaps for sure. But we will also have the occasional large cap.

Interesting. I'm not against that at all. Yeah. It's just that like there is, if you look at the case of Amazon, I think it was, don't remember the exact market cap, but so it's probably tripled since. then or so. And the thing is that like the execution needed for that triple, I don't think many could see that. The execution needed for a triple in a small cap with a one billion market cap, of course, is might not require as much. I think this, I mean, in the case of Amazon,

it's probably a unique, unique situation in history of business, I think. you know with your return and what you told about certain companies you have a certain talent to pick some winners in your portfolio how are you going about winners when do you think about selling them do you decide to double down on winners and sell losers or is there any framework you're dealing with winners not not really in the sense that when I invest in something, it's always a matter of what do I think their earnings power is in two to five years? How does the competitive situation look? You know, the moat, the runway. And let's say a few years later and that particular company is up 200%. I will do the exact same analysis three years later. I will say, you know, so how does the situation look over the next two to five years moat is the competitive position better or worse will it last will it erode and of course there's the valuation component as well and but that's taken into account

exactly the same way whether it's a winner or a loser or something in between so it doesn't affect in any way. So I'm just as likely to, you know, double down on a winner as on a, as, as, you know, doubling down on something that has done less well. And the same thing about selling. Now, I'd say we do not tend to sell often. That's, it's become less and less. And I'd say per year, we probably sell one or two or at the most three companies. And it's usually a situation where we have found something more attractive or just a mistake in the sense that what I believe has proven to be wrong for some reason. It might not mean that, you know, that the investment that the investment

merits look poor from this point but I could sell if I misunderstood something and that happens but yeah it is boiled down to about one two or maybe three per year and hopefully that goes down even more that's preferable so of course it comes to the question like yeah if you have good returns and the valuations go up at some point companies become too highly value and that's true and of course there's some price for all companies where we would sell out of valuation alone but I tend to think about that you know if you're if you're right about our company's runway about its competitive position about its you know business you can basically use you know I get teased because I never

use the DCF evaluation method. I don't, I don't think I even know how to do one, to be honest. You can use the DCF. You can use something based on multiples. You know, you think something is worth 20 times earnings, perhaps. You can use, you know, the second moon landing. And you'll still end up with a fine result after a long enough time. And the opposite is true too. If you're wrong about these things. If you're wrong about the competitive position, if you're wrong about the business and the culture there, no matter how great your valuation method is, you know, even if it's exactly right, you're still not going to do very well. And I think perhaps Charlie Munger has put this really well. He basically said something along the lines of if you invest in a company with a 20%

return on capital, even if you pay a high price, after long enough time, you're as an investor are going to end up with 20% returns as well. Conversely, if you invest in something with a 6% return on capital, no matter how cheap price you paid, you know, if you paid a few times earnings, you're still going to end up after a long enough time with about 6%. So, that's the key and I think while I might have come from from background you know old value school if you want to call it that you know Buffett Greyham of course you valuation might have been the first thing I looked at but around I would say 2015 that changed and you know what I do now is is is

all the other things have to check out first, then you check the valuation. Of course, I want to be sure that it's not something before I start and make a project out of it. I want to make sure that it's not completely out there. So no matter how good the business is, I'm not going to invest. But usually that's not the case. And I think that's the last thing when we make an investment that I look at. You have Jeff Bezos behind you. if i'm right with uh with identifying this picture yeah and he's one of the outstanding managers

and the good managers what role does like management play in your process is a bit like rob vinal who is also looking for the good managers or it's always great to have a good management team um it's it's it's not necessary to do very well I can segue a little bit into Fort Knox. So this was an investment we made about five years ago. Since then, they've had five different CEOs. Now we have the fifth. And, you know, the company has done absolutely fantastic.

So the management is always great to, it's great if it's great. But it's not the most important thing for me. It's a head of valuation, but below sort of competitive position, network effects, switching, that sort of thing and the runway of the opportunity and demand. How sure am I about the future demand? But it's wonderful if you have someone like. like Bezos or what else do we have there, yeah, Buffett on the, that's great to have. And I want to see, I want to have a CEO that is hungry, you know, that's ambitious, that doesn't, there are very few CEOs like Bezos, but as long as they're very hungry and, you know,

they go their own way in their business, if they really understand this little small business here, you can i mean there are many many ways to be a great CEO in my mind and and uh it's of course one factor out of many but not the most important one you already mentioned fortnox and we want to go deeper into this idea because you already told me in our pre-talk that it's a quite interesting company and there's also the story of holding it is quite interesting interesting one. So maybe we can start with what's the business model and how did you get interested in this company and when? Yeah. So, so it's a bit of a coincidence how I got interested in it because so they do a cloud cloud software for accounting, for sending invoices,

for paying salaries, all things that a small business can want to do. And I think there was one key really key idea there there was one key sentence in their annual report around 2014 or so and it said that in a big survey they had found that out of all companies in Sweden only 12% were using cloud software for accounting 12% and this was 2014 or 15 and I couldn't I saw no reason that wouldn't be at, you know, close to a hundred percent some point in the future. So there's about a million companies in Sweden. At the time, they had a little bit shy of 100,000 customers. So, you know, it was clear to me that that 12% number would go up a lot.

That was really the key thing. And then also my wife. started working with the software. So I sort of saw how, I saw that and I could compare it to the competitors because remember, this was 2015 and you were not seeing the type of sales multiples we're seeing today. So at the time, Fortnogs was considered enormously expensive, eight times sales. Today, some might say, you know, eight times sales, that's not so much, right? for many different reasons and that's a longer discussion but basically at the

time you had it had sales of a hundred million I was paying 780 million or so for the for the whole business or eight-time sales that was like scary scary business right I had never at that point invested in anything close to that expensive but the thing is it was eight times sales but really what i saw is in perhaps three years number of customers will double the revenue per customer will go up 50 percent so you'd have revenues of 300 million in 2018 and you i i remember i thought it would make about a hundred million of earnings that year so three years out so i was really paying eight times earnings i wasn't paying eight times sales

And now everyone would agree that, you know, if you're paying eight times earnings for a company that's growing like wildfire, basically, because of this underlying trend, that it's, yeah, the 12% was bound to go up, basically. Everyone would say, yeah, of course, if you have an average, you know, not so fast growing stalwart company straighting at 20 times earnings or 25, everyone would say, you know, yeah, it's enormously cheap, right? It should be trading a lot higher than the average stalwart company. So, but at the time, it was eight times sales and I was scary. But yeah, the key there was to, and I might sound like it was easy, but it wasn't easy at all. But it was, it was the only reason you could do that is because, yeah, the opportunity I had and, yeah, what do you believe? the earnings will be, I think actually this year, they will probably have earnings of around

300 million. So you're really paying like 2.5x 2020 earnings back then. And again, this goes back to if something is obvious to everyone, you know, there's not going to be much value there. So you want to avoid those situations as much as possible, I think. Like if it's extremely obvious you you want to find a reason why it's obvious to you and not to anyone else like why why do you think you have found it and there are millions of other smart people out there why what are you seeing that everyone else and usually you know there is a good reason for for something optically cheap because yeah it's obvious to everyone so yeah it was interesting in that way but what happened is right after the investment so six months or so after they got an offer

to be acquired by their main competitor visma at about 1.4 billion total enterprise value so you had a situation where they were basically break even at this point so very little learnings at this point and the board goes out and recommends the offer as being a very good offer. The main shareholder sends a deferring view letter out to everyone and says, you know, this is just about when earnings are going to start to move up a lot. And it gave a decent case for it, which the board didn't at all. The board basically said that it's nice because the offer is a premium to the last 30 days or whatever, 60 days. And we also got a fairness opinion.

And I asked to see that fairness opinion. And they weren't able to show it, but I doubt there was very much in it. They did pay like $5 million for it. And at the time, remember, this company basically had no earnings. so it had like maybe a run rate of 10 or 15 or 20 million so a third of that they paid in this fairness opinion paid some lawyers to check the deal and remember this was 1.4 billion that would have gone to visma today i think the market cap is probably above 25 billion so they almost gave away you know, 25 billion or so to the largest competitor instead of all the small shareholders.

So what happened is that the offer went through, shareholders voted through by 70% or so. So the largest, I mean, normally you have a higher percentage to that, but the largest owner and a few other large owners also said no. So 30% said no. but shareholders voted through and then about two months later the Swedish competitive authority nixed the deal so and what happened then was stock was trading thereabouts at 23 and the offer was 24 and there was a lot of foreign arbitrage funds i've heard that were looking for this one crowner bounce if the offer went through at 24. So on the day that the offer was declined by the competitive authority, the stock went back

down to our initial purchase price of around 15, like in a day. So we got to buy back at that price. And yeah, we had sold at 23 because I didn't want to be a minority shareholder under this unlisted Visma company, they said that they would accept, go through the offer if 51% of shareholders accepted it. So you could have a situation where you were there as a minority shareholder owning your shares with no influence, you're in the hands of Visma basically. So we were able to sell it 23, went down back to the initial purchase price. And yeah, from there, it's done what it's done.

And basically, if you look at it today, that board, as I said, almost gave away 25 billion. Luckily, you know, the competitive authority helped us and I guess should be a hero for all. Small Swedish shareholders, which I think there were many of that were able to take advantage. Yeah. After this interesting twist and turn story, how does that? the if you're looking back how did the perception of fort knox change because at this time they were some kind of not profitable company yeah they just turned profitable but like it was in the probably millions or at the most of 20 million run rate or so um so i don't i don't really know how

the perception was before 2015 but my my sense is that it was always very highly valued like at a high sales multiple one of the highest but but it was scary for people to to look at those things at that time at least in a very different way as what it is today and I think you know at the end of the day Sweden is Sweden and we don't have thousands of companies like that we don't have hundreds of companies like that and I think what what investors realized is if you have a company that every quarter delivers like that you know no sign in in a decrease in in the growth you know customers are are running over to to become uh users and at some point and i can't say if it was 2016 17 or 18 but at some point it was like this is a very very different company

and it certainly deserves a premium. I'm not one to say whether it deserves the type of premium it currently has, but it certainly deserves a high premium to not only the average company, but the really good companies and great companies as well, because it's hard to think of companies which have a higher switching cost, you know, you're very unlikely to change. an accounting software and the network effect there is great because they are selling through a lot of accounting agencies so they have the 12 largest accounting agencies as resellers basically and a lot of

under a lot of other accounting agencies as well which resell for them and the more that use it the more likely is so when i started when we started river oak in 2017 and there was another company we started in 2015 uh i didn't really have the choice it was basically the accounting consultant said yeah here is the accounting software let's go it's like okay great it costs 99 a month for the accounting service another 99 this is croner so 10 euros 10 euros yeah i was just like what yeah yeah so so 10 years for the accounting 10 euros for invoicing and this is all integrated so when you have an invoice you just book it it's already booked and you're never going to switch because of that the price or convenience or you know and all the consultants know it and not only

that but i think so one one thing that i always look for in all investments is um something i read in one of Stephen Pinker's books, so about consumer surplus. So think about your washing machine, right? You might have paid 500 euros for a washing machine. Let's say 500 euros. Now if I came to you and I said, you know, Tillman, I'm going to take away your washing machine. How much do I have to pay you for you to be without your washing machine the rest of your life? Like it would not be 500 euros right you'd probably demand you know a hundred thousand or like you wouldn't do it and and the same is true like think about google so you're you're we're not paying anything for it if i said you know tillman i'm going to take away google for you and uh you know how much do i have to pay you

we're not ever using google it would be in the hundreds of thousands right and from companies it would be in the millions so there's a huge huge consumer surplus in terms of of the value they get versus the price. And of course, this was really the case here as well at Fort Knox because consumer surplus there is like, I mean, they could probably easily raise prices 30, 50, 100% over time with almost no churn for the simple reason that it's not worth the hassle to switch. like there's already so such a huge value there so um yeah those were those were sort of the main uh main things and i think more and more people have realized that over the years and it has

become reprised not only in terms of earnings having gone from zero to 300 million but But the premium has gone up a lot as well because people realize the advantage of having 30, 40% of the small companies in Sweden and, you know, cross-selling of that and stickiness of those customers as well. And great company, too, like very entrepreneurial culture and they've done a phenomenal job. So it's really fun to be a shareholder. with such a company in many ways in the story you told me there's also your younger you that's a bit shy investing in such expensive companies and made the first step into this world of the higher quality companies with the great growth what enabled this investment in fort knox for you to be able to invest in other

companies that have the same opportunity set? Yeah, I mean, I think I credit Pat Dorsey and his book, actually, for a lot of the Fort Knox investment and being able to hold it. Because it was a key, and it's always in investing, you know, and in anything else in life, I think. It's always when you see, when you do something and you see that it works, you dare, to do it the next time right so if you do a public talk and you know you do it once and it's really scary perhaps a few times or many times but at least you have done it a few times and you know that as long as you're focused on this and this it will work and i think the same was true here because it was really simple if you looked two, three, four years out.

There was no, I didn't do any, there were no crazy assumptions or difficult assumptions even. I think anyone could have done it, but I think most we're looking at perhaps the next quarter, the next year, rather than, and the sales multiple, you know, the valuation based on the current year earnings, which is really relevant in fast growing companies. So I think that was a key moment because it felt good too, as I said, there are so many reasons why it felt good because the business risk is almost zero in such a company. If you're paying five times earnings for something, you're going to have a big business risk usually. So it might not feel as good for many other ways. you want to sleep well, you want to feel good about your investments, you want to, you know, be able to look your kids in the eye and say, you know, we only invest in companies that we believe, that I believe are doing good things and, you know, providing great value.

So, so, you know, typically avoiding those that, you know, charge you a 12% take rate or whatever it was in Brazil. So it's a combination of, you know, seeing that it works, having all these variables, which I think are stronger, carries stronger investment merits, like a very strong network effect, a very strong high switching cost. That carries more weight to me than, you know, paying eight times earnings or five times earnings or whatever it might be. So it took some time and I don't want to say it was a simple transition in any way. But and to be clear, I prefer, we do of course prefer the five or eight or 12 times earnings if we have all these qualities that we want to have. But so I don't have

anything against that at all. It is great if you can have it. But usually you can't. And, And if you look at many of the largest success stories we have in the world today, you look at Amazon, you look at Microsoft, you look at Google, you look at Netflix. There are very few moments over the past 10 years where you've had a chance to buy them very, very cheap, right? So the risk is just as if you're waiting for this big once-in-a-lif-lif-time Black Swan, which really crashes the markets, the risk is that you're going to wait, you know, until you have gray hairs and your kids are all grown up and you're about to thank you for yourself. So it's, yeah, it's just, it's the one variable I would, you know, be more open-minded

about especially if you come from my background perhaps many of your of your viewers come from this background of you know the Graham background where you're really trying to do it quantitatively it was a whole different business case back then to do something quantitatively because there you could have an information knowledge edge right if you just knew some data this is not not possible anymore. So yeah, I think to find the really good investment opportunity of today, you really have to look for these things which are not obvious, which might sound extreme to many people, but which are actually not that strange and you're not making any crazy

assumptions. I mean, I'll tell you one example I heard about COVID when it came. So in the beginning, the number of cases was doubling like every two or three days. And everyone agreed that that was the case. And everyone agreed that we had X cases on, say, March 15. And when you did the math, by April 15, we would have millions and millions of cases. It was very simple math. And this was, I think, what's his name? Paul Graham of Y Combinator.

He wrote something like this. This is exactly what happens when you tell a friend about this. You tell them, you know, we have 100,000 cases today. They're going to double every three days. And they all agree on those two points. But when you tell them, yeah, so that results in five million cases on April 15. They'll say, no, because it's not intuitive, right? It's not obvious for everyone.

So, yeah, I don't know if it was a great example, but it's sort of, it's certainly a case where it's not obvious to everyone and there is a lot of value to be had usually you started with a greyham like toolbox of instruments and frameworks and stuff like that what kind of tools you're not using anymore and have thrown out of this toolbox you you're having now well i mean i i i could probably even i probably even had some rule that say i'm never going to pay more than eight times uh this year's earnings which is really stupid to be honest uh or next year's earnings like uh those type of quantitative rules i yeah those are definitely out i'm not sure if i had one of those but i probably did so that's certainly one that's that's out

models or concepts frameworks yeah but i think even with with graham it's it's really interesting and perhaps not too many know this like he had he ran a fund for 10 or 20 years he had very good returns but at the end of it you know of course he made the investment in geico and the profits from GEICO surpassed all the profits accumulated from all other investments combined. So I think if there is one big takeaway from that, that's it. Like you have, you found one company like that with this enormous opportunity, this enormous runway. And I think, yeah, he believed that he was paying a fairly high price. So he still did it.

I don't know the background of any of it, but you can't argue with the results of it. So I really think that's the case because so much work they put in and Buffett I think has said this too. He was filling out the forms and like checklist for like three, four, five, six points which needed to be fulfilled or else they wouldn't make the investment. And you contrast that with there was once a company in. Sweden and I sent the largest owner. This was for NOx 2 actually. And I and I send them, you know, this great detailed valuation model. Like I had written a full page and, you know, spent a few hours with the numbers like motivating all of it. And remember him saying something along the line. Like when he responded, I was expecting, you know, a few comments on three or

four of the assumptions I'd made. It was basically just like, yeah, nice work. I think the earnings will go up a lot from here. And that's it, you know. And oftentimes, perhaps you don't need to know that much more. So I think that's a big takeaway in terms of like, for me at least, don't use those types of checklists and very strict models in terms of you know being very

computerized about it if you will because every situation is different every company is different and some broad guidelines there is mental models is of course great to have but for me personally

I don't use any type of checklist in that way but some would call the checklist of you know does it have a big opportunity does it have a strong moat in terms of either switching cost or a network effect so that's some type of checklist too i guess but it's very uncomputerized very very very bendy if you will yeah i have the same structure and it's more having a set of questions you you often ask but not a checklist and uh yeah so open-minded checklist i'd call it uh because

because it's different even if you're at a very similar company the ones we've spoken about in Brazil or in Sweden you know they're going to be the chief checklists are going to be different right just there so but yeah the overall I think yeah the overall things that we have spoken about competitive position the the opportunity the runway those are there so that's my checklist i guess for you said you have this framework where you're looking at the companies what happened with them in three to five years um what would you say if i offer you the company called river oak uh with a manager you know what would you say it's the plan for the next three to five years and how would the structure evolve change what can we expect from this

company. Oh, I think, you know, we've started something. So I mentioned, you know, 2013. So it was 800 and something thousand, 820,000. And it's about 140 million today. we probably raised around 45 of that seven million was raised last week actually but but yeah so it's gone pretty fast to to where we are today and but we're still tiny i think in the big scheme of things so so there is you know a long runway for growth in that sense and and uh

I doubt that the structure will change much. There could be some parallel vehicle, perhaps, geared towards larger investors, perhaps. And the two would cooperate, I think. But, you know, I think mostly it's just, you know, keep having fun every day, keep improving and involving every day and you know hopefully investors are happy with with the way it's it's developed so far and and hopefully something similar can be attained over the next five to 10 years and there's no grand vision in terms of you know reaching a certain amount of assets i don't think that's a very meaningful goal and you also

want to be opportunistic in terms of opportunities that come up like so it's possible certainly that we will do some private investments in small Nordic companies but for now i think it's it's mostly more of the same and i'm happy that we have we have investor for many companies now even three continents so you know hopefully add one or two continents maybe and i hope the actors as well that as a point that you have the sixth continent in your fund structure that would be something yeah i hope we can uh perhaps we can do a field trip there what i want to go with the last question to this optionalities or these opportunities you're seeing you mentioned investing in swedish small and midcaps directly what other opportunities are in your head um

So I think to, we're mainly focused in the Nordics. I think we will continue to be focused in the Nordics. But it's certainly possible, you know, when when the world opens up again, I was planning, we were planning to do a trip to China last year. Brazil is on the list too. And those are two interesting. very interesting geographist that I know somewhat now after a few years of studying them. So yeah, when you become more familiar like that, it's certainly opens up the door to do more there.

And there are loads of opportunities there, I'm sure. But just simply because of the fact that home court advantage is, is so big after all and probably if you take all accumulated profits since you know over those past eight years I would say that more than 50% have come from Nordics for sure so so there is uh it's important to be to be humble about you know what led to our results so far. It wasn't investing in any private companies. For example, unlisted ones in Sweden. The process there is completely different, of course. It wasn't investing in other geographies like, say, Africa or Southeast Asia or what have you. It was really done

in the Nordics primarily. And I think it's important to realize that and keep that in mind. How do you think about growing your team or even making it a team? Yeah. I mean, I'll be the first to hire a team as soon as I saw that, you know, it would benefit shareholders. It would benefit our returns. And I mean, it might be a one-man band in terms of the... the regular days in terms of employees at River Oak. But it's really like every day I work with, you know, many other investors and friends that it

almost feels feels like we're working at the same company, even though they have their own vehicles and so forth. But if you didn't have that social aspect, I will hire someone tomorrow without it out because yeah it's a lot more fun I do think at the end of the at the end of the research process I like to say like when you find out about the company name it's a key moment of course in the terms of making an investment but about it's about 1% of the work so you have 99% of the work left to do yourself and so when you do to do do when you do that with some of your friends some of your colleagues i do think at the end of the day it's great to have one decision maker in terms of you know how much do we allocate it's very

difficult i mean let's take you and me tell them we have different backgrounds we have very different knowledge in terms of you know what industries we know perhaps like it's pretty difficult if you come with 50% of the portfolio and I come with the other 50 like how do we allocate that how do we come to agreement so I think there are a few cases where it's been done and it's it works very well ocean link and in China is one I would mention that comes to mind there are two people there that they think very very much alike so I think then it can work but they also have some differences, I think, in terms of, you know, their personalities, which can be a great compliment. But I think it's hard to make that work and make it work really well. At least I don't

know too many examples of it. But I love to do it. So I might. We'll see. Are you taking interns? Not so far. We have we have had a question. up and it's probably on me we have a board so we have discussed it and I took it upon me to look it up but I haven't gotten there yet so thanks for reminding me might be an opportunity also for an interested view who made it till the end of this conversation to reach out to you if you okay with this yeah for sure okay and I think preferably located here in Sweden. So there's an opportunity for the people who

you'd this interview to the end. I wasn't, do you want something to add for the end? No, I mean, it's, if they, if it's a good match, we're absolutely open to to doing that for sure. I am. So yeah, a good idea. Do you want to add something to the general conversation as well?

I don't know. Are you going to, we started with your speed dating question. I have something to add here. Oh, I think. I mean, if I look back at the sort of key. moments I've spoken to here you know there there was this key moment of stop taking shortcuts and the other key moment of like really doing what you love I would say you know if you want to do something well in life and most of us want that even you know some of us are more ambitious

some of us are less ambitious but I think we all want to do You know, we all want to do our jobs well. And the best way to do your job well is to really love what you do. You're never going to be able to do great things in a job you don't love. I think that's something I certainly taken away from life at this point. And it keeps proving true over and over again. And you see so many examples of it. So maybe that.

That's a good word for the end. Thank you very much for your time. And thank you very much for the years taking the time to watch this video or this podcast. Thank you. Thanks a lot, Tillman. It was a lot of time. Bye. Bye to you.

Bye. Bye.