Nearly a year ago this year, I enjoyed the wonderful honor of sitting down with Johan Bynélius, founder of Fair Investments Sweden AB based in Stockholm. In a far reaching conversation, Johan explained his nuanced perspective on value creation through M&A, which I found very eye-opening.
Johan, in the highlight that follows, teaches from his evolution as a veteran intelligent investor and shares a great mental framework. It is a joy to learn from thought leaders around the world — and the world is now flat thanks to the power of the internet. I’m sure you will also enjoy:
(slightly edited for readability)
My investment philosophy has evolved in the years since I first started:
First, I looked at moats — companies that were predictable, we could easily see how their earnings and free cash flow would grow in the future. Those companies usually had a strong competitive advantage — the usual suspects: switching costs, price advantage, or something else. Rather than choosing companies, I actually took away a lot of companies that didn’t fit into this category; I made my universe a lot smaller by looking at moats.
Then, I decided that it is very important to have an alignment of interests in companies that I own. We had a bad experience in Sweden with a company called Skandia; a couple of guys came to the CEO position, gave themselves the salaries that they thought they deserved, actually robbed the company. I don’t want to be invested in the kind of company — where the management might have a different interest than the one I have. I have a basic rule: I want management to have seven times more stocks than they have salary, so they depend more on the performance of the company more than on anything else.
My thinking has continued to evolve. If you have a restaurant selling high-end food and you compare that with another restaurant selling fast food — for example, in Sweden we have a fancy restaurant called Riche and a fast food restaurant called McDonald’s — I would prefer to own McDonald’s rather than Riche. It is easier to put the cash flow the company generates back into the business with McDonald’s rather than with Riche.
My thinking continued to evolve even more. The best thing is if management is not just aligned with my interest but are actually really good at spending the money. There are so many ways you can spend the money a company generates. The normal thing is to pay out a dividend, and I think a lot of managers pay a dividend because everyone else is paying one — without thinking. The best thing is to find a manager who, should the stock tank, he goes all-in. There is also internal reinvestment possibility, building more McDonald’s restaurants. Company management should always compare these two possibilities, just like an investment manager. In my ideal world, I have very high demands on company management: they should be value investors but also value-creators, meaning, they should be very good at making the operations run as well as possible.
Jokingly, I tell my clients that I want all of my companies to have attended to the same summer camp. The camp is called CAMP BARGAIN.
“C” is for competitive advantage — the moat.
“A” is for alignment.
“M” is for margin of safety — management not buying companies or spending money unless there is a margin of safety, there is capital discipline.
“P” is for the potential — the long runway.
“BARGAIN” is buying the company cheap, when you buy it.