HNWI status - July 2014

Below is a summary of my best understanding of the investable assets (in SEK) for some bloggers as of end of July 2014.  For some of the bloggers the data is a few months old as there has been no update.

NB: HNWIs are defined as those having investable assets of US$1 million or more, excluding primary residence, collectibles, consumables and consumer durables.

Exchange rate as of July 31st, 2014: 6,90 SEK/USD

I was still able to make it above the 1 MUSD mark by having investable assets of over
7 000 000 SEK as per end of July 2014.

How to generate income and what is an asset

Kids, one of the books that you should read very early on in preparing for investing is the 'Rich Dad Poor Dad'-series by Robert T. Kiyosaki. There are a number of books written by him and they are all fairly easy to read. As always, with anything you read or hear, you need to be critical and have your own thinking and opinions about the material. But you should always also open your mind to new and interesting ideas and not shut them out before thinking about them critically.

For me there have been two key take-aways from reading these books; a) one about how to think about different structural options to generate income and b) one about what is an asset and what is not.

A) Regarding the structural options to generate income, Kiyosaki introduces a concept of a 'CASHFLOW Quadrant', which basically lists four type of ways to generate income.

Most people in today's society live their lives mainly on the left-hand side of the quadrant, i.e. as employees or as self-employed (e.g. small-practice lawyer, doctor or similar). Even though it is possible to reach financial independence on the left-hand side, most people who have reached it have done it on the right-hand side (as business owner and/or as investor). Please however remember that there are also many failures on the right-hand side, not everyone who tries that side will succeed.

I strongly believe that you should try to find your the passion in your life from which you can also generate a healthy income to live off and to invest. This can be in any of the four quadrants. However, I also strongly believe that you should as early on as possible develop your skills as Investor to have your excess money work for you. This will give you financial independence at some point in time and give you many additional degrees of freedom in your life. Even if you do not think investing is fun, you should at least try to acquire knowledge of the basic concepts within investing, so that you at least can challenge and potentially judge the advisors that you want to have to help you with the investor quadrant.

Personally, I have spent most of my time after university in the E square, but for the last 15 years also allocated capital in the B quadrant. After reading 'Rich Dad Poor Dad' I have for the most of my career sought after job positions where I can combine E with B in order to get some of the financial upside of the B quadrant and also to get as much understanding of how successful people in the B quadrant think and operate and to learn things that I can also use in the I quadrant. I have, however, never been the majority shareholder and/or founder of a business, so in essence I have not really given that quadrant a proper go. In parallel, also for nearly 15 years, I have started to build my skills in the I quadrant. Most of the posts in this blog relate to the learnings and ideas I have about being an investor and those I want to pass onto you, no matter what you choose to do in life for a living.

B) The other key take-away is regarding what is an asset and what is not. Until my early 30's I was so 'brain-washed' from school and university with the concept of assets being such things as the apartment or the house where we live or even the car we own, i.e. things that have a market value. It was not until I read 'Rich Dad Poor Dad' that it struck me that an asset is 'anything that produces a positive cash flow'. Our house will only produce a negative cash flow as long as we use it to live in and the same goes for our car. Hence they are not assets, they are only 'liabilities' and have a huge alternative cost... The most practical example of this is that we today could sell our existing house and move to a much cheaper house somewhere on the countryside or a smaller town, become debt-free and have all the cash-flow from real assets that we need to live a comfortable life without needing to work. But with the current 'assets' (mainly our house) I still need to work as it consumes cash (rent payments, running costs and maintenance costs) and hence is NOT a true asset (that generates a positive cash-flow). A share in a company is however most often generating cash to the owner through dividends or share redemption programs and this is in my world a true asset.

As a final remark, I think one should focus most of the attention on how one can generate the most income rather than spending as little as possible. The reason is that it (at least for me in relative terms) is so much easier to spend little money, whereas the effort to increase income (through getting a higher-paying job, starting and driving a business or learning how to invest successfully over time) is much, much tougher. Naturally one should keep costs low, but it is only a (smaller) part of the key to achieve financial independence.

Betsson - my largest holding

My largest holding (measured as current value) is currently Betsson. I have owned the company during the more than three years (measured as weighted average) and the first investment was done about 4,5 years ago. On a few occasions the last 1,5 years I have sold smaller parts of my investment, but also added positions. Net divestment during the last 1,5 years is 850 shares.

During the time that I have now owned the company my CAGR (pretax, but incl. received dividends after-tax) is above 25%, which is far above my long-term investment return target of 10% p.a.

In the chart below I have plotted the EPS TTM (last twelve months) for Betsson as red bars and then the closing price as the blue line and the corresponding P/E TTM in the green line. The flat red line is the average P/E TTM (14,0) during the period (since Oct 8th 2007). The black arrows indicate when I have bought (upward-pointing arrow) and when I have sold (downward-pointing arrow). The length of the arrow correspond to the size of the transaction in number of shares. In the chart it is a hard to see that the EPS TTM is now close to 14 (13,88 to be exact, based on the recently released Q2 report).

As you can see from the chart above the first investment was made at a fairly high P/E (of about 15,5) in early 2010. One of the good things about following a company for a longer time, is that you start to get a better understanding for when it is cheap and when it is expensive. In mid 2011 I was even more confident that the company was attractively priced and added a fair position. Over the last 18 months I have started to take some money 'off the table' through a number of divestments. The main reason for this is that due to fairly high valuation at several points in time (P/E well above 14), I have judged it a good time to take some money 'off the table'.

What I like about this company is
- strong (although diminishing) ownership by physical persons
- consistent management; Pontus Lindwall (former CEO) now holds the Chairman position in the Board and works actively with strategic tasks
- fantastic ability to generate and distribute cash (through redemption of shares) to shareholders while growing the business
- market leading position (no 1 or no 2) in key markets
- seem to be able to acquire other smaller companies at interestingly low multiples to EBIT
- seem to (here I would, however, still not draw too far-reaching conclusions) learn how to integrate those acquired companies into existing operations to extract synergies
- seem to build in-house capabilities in many key areas (IT platform, payment solutions, data mining, proprietary games, marketing etc) to be successful in this business, while continuously pouring money into marketing
- 'pricing power' in the sense that this business should always - all else equal (i.e. mainly given a stable competitive situation) - be able to offset impact from inflation
- the option of successfully entering the Chinese market, which could potentially allow for massive growth over many years

There are also a number of key issues with the business, the main being that I do not see any clear moat (competitors popping up left and right as limited capital is needed to start up a business). If I had seen a clear moat, I would probably have poured all my money into this single company as it otherwise have nearly all characteristics that I like for a company that I want to own.

Today, I would most likely not add to the position unless P/E comes down to 14 or below before year-end this year. However, I do not believe I will sell either (at current price levels) as I think the company will be able to continue to grow its earnings in a pace that will give me some 8-9% total investment return over the next 10-20 years (given that they can hold an RoE at 32% or more and continue to reinvest the same share of their earnings into the business as they have done the last couple of years)

HNWI status - 2014 Q2

Below is a summary of my best understanding of the investable assets (in SEK) for some bloggers as of end of Q2 2014.  For bloggers marked in red, the data is a few months old. A few bloggers have been added since last update.

NB: HNWIs are defined as those having investable assets of US$1 million or more, excluding primary residence, collectibles, consumables, and consumer durables.

Exchange rate as of June 30th, 2014: 6,74 SEK/USD

I was still able to make it above the 1 MUSD mark by having investable assets of about 6 950 000 SEK as per end of Q2 2014.

Quarterly update - some historical notes

This post will contain a number of historical reflections on the post 'Quarterly update 2014 Q2'. Please refer to it to easier understand my comments.

The current level of debt vs. property value is the lowest that we have ever had since starting to pour cash into our living premises, but in absolute terms it is still higher than at most times, however it is down from the top levels two to six years ago. We have switched property several times and the first two quarters in the summary show the actual price appreciation between a purchase (which was a couple of years before Q2 2004) and sale in Q3 2004. At that time we did something very uncommon in the market in the city we lived in, we sold our property BEFORE we bought a new one (this practice became much more common after the crisis in 2008). We were also very diligent when looking for new property and probably looked at about 100 different properties before we finally were able to acquire one where I actually thought there was an inaccurate price (in relation to value) in the market; we were at that time in a strongly rising market able to buy the property at a seven percent lower price than the seller had paid several years before (the broker clearly told me a couple of days before closing that he did not think the seller would accept our offer). Three years later we were able to sell the property at a price well above 40% more than we had paid. In the summary I have spread out the appreciation equally per quarter over the holding period. Furthermore, the last few years we have chosen to drive down debt in two larger one-off 'amortisations'. I did this in order to take down the risk to a level that I am more comfortable with, and to counter the effect from increasing interest rates (boy have I been wrong there so far...). At a debt level below well below 50% and interest rate at all-time low we are currently not doing any regular monthly amortisation.

So while fairly diligent on the property side already early on, I today with hindsight would really like to give you kids some advice on cars. Today we own a really basic car, bought used while still not being too old or having too much mileage to (hopefully) incur too much issues (and costs) with repairs. More than ten years ago I went 'all-in' buying a brand new car (in cash). Don't do that when you are young (unless you already have made all the money you will ever need)! The alternative cost for that cash has proven to be fairly high, so I would today have been able to drive a used Porsche Panamera instead ;-) or better, already laid the first part of the equity fund to pay off the remaining debt.

Kids, it is also always very important to remember that these assets (property and cars) are cash-consuming, so I do not view them as keys to building wealth, rather the opposite. They just cost you. You can (or if you run into trouble have to...), however, dispose of them to improve your debt situation. The less of these type of assets (cash-consuming) you acquire (especially early on in your lives) the more you can invest in the cash-generating assets.

So, now to the really funny part, the financial assets. They GENERATE cash. Every year we get a CASH amount as dividend or interest (on cash). This year alone, the cash amount generated by the financial assets will be higher than total financial savings were ten years ago. It is quite amazing when I think about that now.

In general I have put nearly all surplus cash (except the two larger amortizations mentioned above) into financial assets over the last twelve to thirteen years plus reinvested dividends. The CAGR value growth since late 2000 is currently somewhere above 12%, probably close to 13%. This will probably fall down to 9-10% when the next major correction will come. Still, this is a number I am OK with, even though my ambition would be to increase it somewhat when retiring fully and being able to spend more time following potential investments.

As you see from the asset figures, (easiest seen in figure 2), I was lucky to hold a fair share of my financial assets in cash by end of Q32008, and then going 'all-in' in the beginning of Q42008 when the world was in turmoil. Since then it has basically been a soon six-year very positive development in the stock markets. As you can also see I have nearly all the time since more than three years operated with a fairly high amount of cash, having the 'gun' ready for shooting. As you can also see, the last quarters I have shifted over even more of the financial assets to cash, basically just loading the gun with more bullets as I cannot find any big elephants to shoot. My cash amount is today higher than my total financial assets were less than six years ago, so there is now some firepower if/when needed.

Current HNWI status

Our base is currently in northern Europe and that's where you've experienced your first years of your life. Having seen a few places around our globe, mainly in Europe but also in large parts of Asia and some in Africa and the US, I genuinely treasure the ease with which one can get access to the nature in the Nordic countries. I hope you will also treasure that; it is a fantastic combination of a region with high living standard, a society with a fair degree of trust among people (even though I unfortunately believe it is slowly eroding) and a fairly clean and very accessible nature.

A short while ago I surpassed a major milestone in my investing life, I am now able to call myself a HNWI (according to the definition used by Cap Gemini, World Wealth Report). This will most likely change a few times over the next two to three years (i.e., I will fall out of the category), but hopefully after that I will be a stable HNWI.

NB: HNWIs are defined as those having investable assets of US$1 million or more, excluding primary residence, collectibles, consumables, and consumer durables.

Exchange rate as of May 31st, 2014: 6,66 SEK/USD

Below is a summary of my best understanding of the investable assets (in SEK) for some bloggers. The list is not complete and unfortunately lack some bloggers in Scandinavia (such as 40%20år, Riskminimeraren, Fundamentalanalysbloggen, Spartacus, Defensiven, AnotherValueinvestor to mention some of the most interesting) where it would be interesting to know what investable assets they have. For bloggers marked in red, the data is a few months old.

Anyway, a key take-away:
I think investable assets is a good guidance/proxy for how much to take impression from each respective person that you try to learn investing from, i.e. the bigger the sum of investable assets, the more you should weigh in what they write/think.

Glad midsommar to you all!