Price drives narrative.

When Intellego’s stock was on its way to SEK 220, it was the best Swedish export!

However, when the stock fell to SEK 66, it was labelled a fraud. Even Montega, the only analyst, bailed coverage from 8th Oct due to the concern we had all along - lack of disclosure.

While ‘the house’ was on fire, nothing has changed within the company. Insiders haven’t cashed out, large customers haven’t terminated contracts, and EKN (the Swedish government) or Nordea, the most significant financing backer, haven’t said a bad word.

On the contrary, the FY2025 guidance was raised, and a new €22 million order has been announced. EKN/Nordea has increased its credit line by approximately SEK 500 million.

However, given the 50% decline within just a month (1st September to 9th October), and the continued ‘start-up-like’ communications from the founder-CEO, I can no longer classify it as ‘sleep-well’.

I have made a MISTAKE.

The biggest mistake since going paid. I apologise.

To improve, I’d like to outline a plan, but more importantly, I will reassess my position in Intellego.

Should I sell Intellego’s stock at a 50% loss, or should I hold to find out the truth?

So, this is what I will cover today.

1. Timeline of negative news

2. What I did wrong and the lessons learnt

3. What I did right

4. What do I do with the 50% loss

5. Improvements

SWI' writeups on INT: [deep dive, 1st buy, 2nd buy, 3rd buy, risk management, 1st live event, mispriced]

1. Timeline of bad headlines

• September 11, 2025: Negative news from Sweden titled ‘Two top executives have left the stock market crash - CEO puts the lid on it’

• September 12, 2025: Short report (Kobayashi) built up from SS’s Short in June’s [here], both anonymous.

• October 2, 2025: Intellego provides additional information on cash position following preliminary Q3 2025 results announcement

• October 2, 2025: Another short report

• October 8, 2025: Clarification regarding press release “Intellego’s subsidiary Yuvio receives order worth EUR 22 million”

• October 9, 2025: Montega suspends ratings

• October 9, 2025: New COO Henrik Resmark starting Jan 1, 2026.

The first and second short reports had a powerful impact on the share price — see the chart above. The second one really exploited the ‘vague’ communications from the CEO, ultimately questioning the usefulness and existence of the product. All of this culminated in Montega suspending coverage until better disclosure and a new executive hire, specifically a COO, following the hiring of a new CFO in June.

At this point, Intellego is trading at 5x EBIT (~80 SEK), a 55% decline from my average cost of 11x EBIT (~170 SEK), and 60% from my initial purchase price (~200 SEK).

2. What I did wrong and the lessons learnt

• Placed too much trust in management. Trust comes from doing what you say. The CEO does deliver in terms of headline numbers, but the issue lies in the ‘saying’ part. Claes’s communication has been vague and lacked transparency, which planted doubts about the cash flow. I appreciate that the rapid growth was challenging and that Claes will improve with time. And, even though he is seeking help from the new hires, I think he needs to step down and appoint someone else as the CEO.

  Lesson: Don’t underestimate the importance of communication/disclosure of a company. And don’t assume the stock price is an indication of excellent execution.

• Forgot that cash is king. Intellego’s sales and profits trend was one of the best I have come across, increasing tenfold since 2022, following its vertical integration (through the creation of Yuvio and the acquisition of Daro). However, the conversion to hard cash was contracted by long-dated payment terms (reportedly up to 12 months initially). In other words, booked profit in Q1 2024 would only be converted to cash in Q4 or Q1 2025. There was some evidence of that in Q2 and Q3 (preliminary). However, I jumped in too early. It would be better to wait for at least a full year of cash conversion in motion to get the certainty and understand the seasonality.

  Lesson: Revenue is vanity, profit is sanity, but cash is king. Wait for at least a full year of cash conversion in motion.

• Stepping out of my lane, rushing to buy, overconfidence. I specialize in time-tested and anti-fragile businesses. I should never forget that. I also got overconfident, given my past success/luck. Intellego, while indicating qualities to be one, was premature in labeling it as a ‘sleep-well’ given the fragility in the disclosure and the time it was taking to collect money from customers. I was also ‘charmed’ by the upside potential (low coverage and low institutional ownership) and the validation from EKN (the Swedish government). Although it was a small position (now 3%, previously 5%), the mental space it occupied was more significant than the 24% allocation in my top position, Sea Limited.

  Lesson: Stick to my lane, and only step out with lower exposure and slower buy-in. Be extra critical of companies with a non-institutional shareholder base, where share movements could be more driven by emotion.

3. What I did right

While I bought in quickly and called it a sleep-well pick, what I did right was:

• I mentally prepared myself to expect and stomach volatility. I experienced worse drawdowns in Sea Limited (70%) and CrowdStrike (50%) in the past, and so coming into Intellego, I was ‘prepared’ for a bumpy ride.

• I allocated accordingly to the risk I was taking (5%). If I were to lose that amount, it would not impact my life. The 5% limit saved me from adding more when the stock appeared ‘attractive’, as noted in the write-up below (September 16th).

• I remain focused on the long-term driver of value: cash flow conversion. I believe the business outcome remains unchanged in the long term. Customers haven’t canceled contracts, Claes hasn’t sold shares, EKN or authorities haven’t investigated and indicated any wrongdoing. We will know more in Q3 and Q4.

4. What do I do with Intellego’s 50% loss?

Given the magnitude of the mistake and the short period of time I have owned the company. I will hold onto my shares to let my thesis unfold.

The glaring -50% loss will serve as a reminder for me to work on my mistakes and that I am not committing one of the most common mistakes in investing: panic selling when the stock is down and the thesis isn’t broken. I have a diversified portfolio, and I don’t need the cash today; there is time for the thesis to unfold.

The impact of a 50% loss in a month (~500% loss annualized) means it has reduced my average holding gain to just 39% (from a 45-60% range since inception).

Bad for my ‘marketing’, but as loyal readers know, I am not doing Sleep Well Investments for attention. I am doing it, partly for the money (thank you for your support), and mainly for the joy I get from learning to explain why and how a company creates value. And in that process, improve as an investor, learn from my mistakes with you, and, as a byproduct, accumulate a meaningful sum of ‘startup capital’ for my daughters when they grow up. The substance I receive from that every day is a privilege, and I want to ensure it’s lasting and impactful to you, too. Hence, as we advance, I’ll continue to make improvements.

5. Improvements for SWI

• I will introduce a threshold for ‘sleep-well’ picks to minimize getting into ‘story’ stocks (typically small/micro cap). I’ll update on this in my next deep dive; perhaps parameters such as market cap, corporate governance standards, years of existence, or time on the public market should be considered.

• Be more patient - buy in slower, wait for more evidence of cash generation, particularly on less time-tested companies. All has trade-offs. So, I must accept the possibility of lower returns for lower-risk investments.

I hope you will learn from my mistakes today!

Please send me your feedback, and I apologize again for labeling Intellego as a ‘sleep-well’. Since I’m not selling, you will see this mistake permanently in my Sleep Well Investments Portfolio and any future ‘branding’ of the newsletter. Even if it becomes green in the future, I will still highlight it as a mistake!

In closing, I’ll leave you with an interesting hierarchy of information funnel. Guess where Intellego stands?

If you are new, read more about us here, our latest portfolio review here, and best buys here.

Disclaimer

As a reader of Sleep Well Investments, you agree to our disclaimer. You can read the full disclaimer here.

Build your Sleep Well Portfolio today

Hi, fellow sleep well investors,

I hope you are enjoying Sleep Well’s outperformance with a 47% average time-weighted return per pick (35% money-weighted) since October 2023.

Sleep Well Investments was initially built on the ideas of three wise investors:

• Anti-fragility borrowed from Nassim Taleb,

• Irreplaceability from Anthony Deden,

• Mundanity from Matthew McLennan.

Today, I want to highlight lessons from Pulak Prasad's book — What I Learned about Investing from Darwin.

Pulak Prasad, the founder of Nalanda Capital, blends evolutionary biology with investment philosophy, making the book easy and enjoyable. Prasad outlines key learnings from Charles Darwin’s theories that have shaped his successful long-term investing approach. Below are the core takeaways based on his work:

Survival instincts and nature’s slow evolution help build a successful investment strategy

1) Avoid significant risks - survival instinct

2) Hold for long-term - allows for slow evolution

The first rule—avoid significant risks—resonates strongly with sleep-well investments. This mirrors survival instincts in nature, where prey animals prioritize avoiding fatal mistakes over chasing every opportunity.

Prasad insists on minimizing "errors of commission" (investing in bad businesses) over "errors of omission" (missing out on good ones). He parallels animals like antelopes, which avoid risky waterholes to survive predators, suggesting investors should avoid speculative or volatile opportunities, even if it means missing potential gains like Tesla.

At Sleep Well Investments, I only follow a few of the best under-followed businesses whose survivability is the most crucial aspect of my investment decision. It’s the key reason the portfolio has overperformed and has only one loser (so far).

The second rule is — holding for a long time, inspired by evolution's slow, compounding nature, where he promotes a "lazy" strategy of indefinitely holding high-quality investments.

He argues that frequent trading undermines compounding, like how species evolve gradually over millennia. Nalanda Capital rarely sells unless fundamentals deteriorate irreparably (e.g., poor capital allocation), not just because of high valuations. This patience leverages time as an advantage, allowing returns to grow exponentially, even if it requires enduring short-term stagnation.

I also love what Pulak Prasad said.

“not selling makes us better buyers”.

It creates a high bar for every new buy as it has to improve the existing portfolio of companies. I’d add that holding for the long term trains us to think like owners and show us what matters most to the business.

At Sleep Well, we often have to sell to buy a new company, so we must ensure we are correct twice. This is a really high bar to meet, given that to be successful in investing, you need to be correct six out of ten times. But so far, so good. We have pushed our luck to 18 correct decisions out of 22 (including 4 sell decisions).

One KPI - silver fox experiment

In the 1950s, Soviet scientist Dmitri Belyaev conducted an experiment in Siberia to domesticate silver foxes, aiming to understand how wolves evolved into dogs. He selectively bred foxes based on a single trait: tameness (friendliness toward humans). Over generations, this process produced calmer foxes and unexpectedly yielded other positive traits—floppy ears, wagging tails, and even changes in coat color—mimicking domesticated dogs. Belyaev’s insight was that selecting one core characteristic could unlock a cascade of beneficial outcomes without needing to predict or engineer every detail.

And that’s what Prasad did.

Return on Capital Employed (ROCE) is his most important KPI. He only invests in companies with high returns on capital.

To him, high ROCE indicates good management quality, efficient capital allocation, building a solid competitive advantage, and balancing good growth with profitability.

Six things Pulak Prasad avoids

• turnaround cases,

• high-debt companies,

• government-owned companies,

• fast-changing technology industries,

• companies always looking for M&A for growth,

• dodgy management/poor corporate governance.

Prasad uses examples from nature to reinforce his philosophy, particularly the last one. A small frog mimicking a larger rival’s croak highlights the need to detect corporate deceit, urging investors to look beyond surface-level metrics. The analogy underscores adaptability, survival, and discipline—traits essential for species and investors.

I agree with most of the above six but can’t entirely agree with the fifth one, as some very successful serial acquirers use M&A as a primary engine of growth—Constellations Software and Addtech—from my favorite 10, or some use M&A to complement growth, such as Wisetech or this naval engineering company acquiring companies to leverage core competency.

Credit to Pulak, he also concedes that avoiding serial acquirers has a downside: one can miss out on genuinely good companies where change occurs.

The book is a perfect refresher on proven investing principles and would help refine your investing process. If you are new to investing, it complements Peter Lynch’s books; I have reviewed one (One Up on Wall Street) here.

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I love learning from smarter investors; in case you missed it, I shared recently:

• Invest like Peter Lynch

• 5 lessons from Scott Fraser

• 7 lessons from Ralph Wanger

• 5 lessons from Terry Smith

Latest sleep-well picks:

My top picks for 2025 and beyond

Thank you for reading. If you have found my content value-added, subscribe and spread the word so more long-term investors can sleep well.

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1. High success rate stock picks—47% time-weighted gain per pick since Oct 2023 (35% money-weighted).

2. Deep research of high-quality businesses and regular tracking. Buy and verify.

3. Free samples of deep dives, tracking updates, and buy alerts.

4. Free articles on investment framework to help find quality companies and execute with discipline.

5. A 30-minute Zoom call per quarter with the founder plan, or email me at trung.nguyen@sleepwellinvestments.com for individualized service.

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Disclaimer

As a reader of Sleep Well Investments, you agree with our disclaimer. You can read the full disclaimer here.

Build your Sleep Well Portfolio today

Hi, sleep well friends,

Sleep Well Investments was initially built on the ideas of three wise investors:

• Anti-fragility borrowed from Nassim Taleb,

• Irreplaceability from Anthony Deden,

• Mundanity from Matthew McLennan.

I took a few leaves from Terry Smith and Ralph Wanger’s playbook. Today, I want to bring your attention to Peter Lynch, who compounded 29% CAGR over 13 years at the Magellan Fund of Fidelity Investments between 1977 and 1990. His track record is the best-performing mutual fund in the world.

His books, Learn To Earn, One Up On Wall Street, and Beating The Street, are the most practical investment books I have ever read. I’ll focus on One Up on Wall Street, which discusses an underappreciated part of investing: developing an investor's mind. I then share Peter Lynch’s simple criteria for picking winners.

How do you develop a mind for investing?

First, what do you need? According to Peter Lynch:

studying history and philosophy is much better preparation for the stock market than, say, studying statistics.

and,

all the math you need in the stock market you get in the fourth grade.

This means that everyone with a curious mind can be an investor.

Second, you must believe you can learn and even beat the professionals. Because you can!

Peter Lynch says the stock market is rigged in your favor compared to professionals, i.e., the banks and hedge funds.

You are not limited to the size or location of your investments. You can make unpopular decisions and invest in overlooked businesses. There is little groupthink and no job security to worry about.

“Between the chance of making an unusually large profit on an unknown company and the assurance of losing only a small amount on an established company, the normal mutual-fund manager, pension-fund manager, or corporate-portfolio manager would jump at the latter. Success is one thing, but it's more important not to look bad if you fail.”

Plus, you are in control of your capital. When the market is down, you can put more to work; this contrasts with professional funds, where clients often withdraw money in a down market, limiting the opportunity to take advantage of volatility.

Operating like an amateur helped Peter Lynch achieve such an illustrious track record:

"The stocks I try to buy are the very stocks that traditional fund managers try to overlook. In other words, I continue to think like an amateur."

If you like the business, chances are you will love the stock.

Your direct experience using a product is your best research tool about a business that a Wall Street analyst may never fully understand despite spending hundreds of hours learning. So, if you are a doctor, you would have an edge in pharma businesses, and if you are a builder, you should be positioned better to study housing stocks. The bottom line is that you should invest in what you know better than others, and much like buying groceries, read the label.

Next, how would Peter Lynch find suitable investments?

He divides stock into six categories:

• Slow growers - large and often pay dividends, unlikely to beat the market.

• Stalwarts - 10-12% earning growth.

• Fast growers - are expensive; however, if you can answer how many more years it can keep growing, you will likely beat the market here.

• Cyclicals - businesses with revenue and earnings that follow the business cycles. Often, they are consumer products that users can postpone spending on in uncertain financial times.

• Turn around - businesses with issues, the key is identifying whether they are temporary or permanent.

• Asset play - companies with undervalued assets such as real estate, patents, or natural resources.

Not all companies fit in one, of course; McDonald's, for example, moved from fast growers to stalwarts to an asset play, then now to a slow grower.

Ralph Wanger, Scott Fraser, and quality investors would avoid slow growers, turnaround, and cyclical. For Peter Lynch, he avoids

• Hot industry - where competition is intense

• The next something - the next Amazon?

• ‘Diworsifying’ - Business entering unrelated industries

• Dependent on single customers/suppliers

• Whisper stock - curing cancer / removing addiction, etc.

He advocates a simple screen of ten traits to look out for winners / ten-baggers.

• Dull name

• Dull product

• Dominate a niche

• Disagreeable business

• Depressing (mortuary business)

• Insiders buying

• Recurring revenue

• Company buying back shares

• Not in fast-growing/sexy industries

• Not owned or followed by institutions

All valid points are easily applicable to any investor’s checklist. I particularly like the first two points.

“A company that does boring things is almost as good as a company that has a boring name, and both together is terrific. Both together is guaranteed to keep the oxymorons [institution investors] away until finally good news compels them to buy in, thus sending the stock price even higher.”

Peter Lynch goes further, saying that boring businesses with boring names that make people turn away in disgust are even better.

At Sleep Well Investments, we have quite a few of these companies, such as:

• dull products (building homes - NVR, vacuum valve - VAT Group)

• dominate a niche (deliveries - Grab, convenience stores - Dino Polska, Helmet protection - MIPS, Logistics Saas - Wisetech, Excess and Surplus Insurance - Kinsale)

• recurring revenue (Crowdstrike, Veeva)

• high insider ownership (Mercardo Libre and Sea Limited)

• rumor abound - Wisetech’s CEO sex scandals

Check them out in this directory of Sleep Well writeups.

That’s it for today.

Subscribe now

In case you missed it, I shared recently:

• 5 lessons from Scott Fraser

• 7 lessons from Ralph Wanger

• 5 lessons from Terry Smith

• The Most Sleep Well Investment Of LATAM

• Sleep Well Portfolio Oct Update

Thank you for reading. If you found my content valuable, please subscribe and spread the word so that more long-term investors can sleep well.

Share

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Share Sleep Well Investments

Reminder: How can Sleep Well Investments help?

1. High success rate stock picks—33% money-weighted gain per pick since Oct 2023 (61% time-weighted).

2. Deep research of high-quality businesses and regular tracking. Buy and verify.

3. Free samples of deep dives, tracking updates, and buy alerts.

4. Free articles on investment framework to help find quality companies and execute with discipline.

5. Promote yourself to 6000+ stock market investors (47% open rate) — Contact me: trung.nguyen@sleepwellinvestments.com

Disclaimer

As a reader of Sleep Well Investments, you agree with our disclaimer. You can read the full disclaimer here.

Build your Sleep Well Portfolio today

Hi, fellow sleep well investors,

I hope you are enjoying Sleep Well’s 33% average money-weighted return (61% time-weighted) since October 2023.

Sleep Well Investments was initially built on the ideas of three wise investors:

• Anti-fragility borrowed from Nassim Taleb,

• Irreplaceability from Anthony Deden,

• Mundanity from Matthew McLennan.

Today, I want to bring your attention to Scott Fraser, the lesser-known Canadian investor who compounded 19.5% over 30 years (1990 to 2020).

He is a fascinating man who loves salmon fishing in his free time and still enters squash tournaments in his 90s. Like Ralph Wanger, he stays out of the limelight and has plenty of investing wisdom to share.

He wrote ‘Picking Winners,’ an easy investing book with practical tips. Here are my key learnings that I apply to Sleep Well Investments:

1. Time in the market > timing the market.

2. Own good companies.

3. Avoid ‘lazy working capital and cash hoarding’ businesses.

4. Corporate governance > ROIC track record & insider ownership.

5. Sell the least loved investments.

1. Time in the market > timing the market

“All my life, when there’s been a crack in the market, I’ve stayed in,”

“That happened when the tech bubble burst in 2002. Stay the course.”

In a rare article profiling Scott Fraser, he reiterated the importance of staying the course during the global Coronavirus pandemic. The SP500 dropped 37% within a few weeks of China announcing the lockdown in Wuhan but then claimed new highs within a few months. Anyone who ‘sells first and asks later’ and sheltered in cash would have missed all the gains. The loss (missing the rebound) is permanent.

“[…] the whole basket of stocks went down. In previous times, people used to be able to take refuge in defensive stocks like utilities that weren’t volatile and paid a good dividend. This didn’t happen because the way most people reacted was to sell the whole index (ETFs), utilities included. Everything went down at the same time, and there was no place to hide.”

Scott Fraser compared the 2020 panic to the 2008 recession and how it left investors with long-lasting fear of the market.

In 2008 and 2009, we saw many investors lose thirty, forty, or fifty percent and then do panic selling. Once they had felt so much pain, they didn’t want to get back in, so they missed out on the rebound.

Others tried to “call the bottom” in stocks, betting that the market had reached its turnaround point, but that’s very hard to do. There are so many false bottoms and false rallies in these situations.

“This crisis is the same as 2008,” Fraser believes. “Instead of a banking crisis, we have a public health crisis.”

So, when the next crisis comes, you need some patience to wait it out, he says. If you are fortunate enough to have enough for retirement, your time horizon for investment returns can go from a few years to a decade or more, and you can be confident that, at some point, the market will come back.

2. Own good companies

In Fraser’s view, the most important thing is owning stock in good, well-managed, and solidly financed companies. Of course, they can be stressed by upheaval, but they tend to emerge in relatively good shape compared to most.

While the financial crisis in 2008 or the health crisis of 2020 profoundly impacted economies around the globe, the old rules for picking winners will still apply.

What are good companies to Scott Frasers?

3. No Lazy Cash

Scott Fraser views capital as sacred. Anthony Deden, a pillar of Sleep Well Investments, dives deep into this and will come in a separate post. Thus, he avoids companies that have lots of working capital. This often means the business model is inefficient or that the cash is not going into reinvesting in the business.

He avoids companies that build up cash or use it to pay dividends. Scott takes a drastic view on cash, but it is an excellent food for thought, as how management uses cash reflects their quality.

In one of his best-performing investments, CCL Industries, he sold the stock as soon as it started to build a significant cash position. So, in his view, look for companies that:

• Miminise working capital

• Reinvest excess cash

4. Corporate governance

Scott Fraser cares more about how the top management acts than their reported return on invested capital (ROIC) track record or how many shares they own. That means how these managers treat their employees, shareholders, and customers. In his view, if businesses can build and maintain a balanced ecosystem (customers, employees, suppliers, etc), then in the long term, they will attract good people and eventually become suitable investments.

Canadian National Railway and Canadian Pacific Railway are good examples in his book.

5. Sell your least loved position

I love this advice.

Most people have too many ideas but not enough cash. Myself included, I often need to sell to buy a new business.

Secondly, owning a business you don’t love wastes time and resources that could be used for the best ideas. This happened with one of our holdings—Medistim. It was sold in July to fund our purchase of Fortinet, a superior business. The result is a stellar gain of 43% vs. 0% if Medistim was kept.

Summary, Scott Fraser’s teaching in five bullets:

1. Time in the market > timing the market.

2. Own good companies.

3. Avoid ‘lazy working capital and cash hoarding’ businesses.

4. Corporate governance > ROIC track record & insider ownership.

5. Sell the least loved investments.

That’s it for today.

What do you think?

Some overlaps with Ralph Wanger’s Seven Lessons?

1. Use long-term themes to narrow down small-cap GARP picks

2. Extend investing horizon.

3. Select businesses with attributes that can withstand challenging times

4. Stick to your process and what you know, and ignore the fads and noise.

5. Buy cheap at replacement value at 2yr EPS growth.

6. Buy when people think it will get cheaper.

7. Avoid cutting flowers.

Or Terry Smith’s Five Lessons

1. Buy great businesses and let them do the compounding.

2. Choose the quality of the business over the cheapness of stock.

3. Return on invested capital is a better value creation metric than earning per share.

4. A high reinvestment rate at a high ROIC is better than buyback and dividends.

5. Pay up for quality; it’s worth it. (hardest lesson)

Subscribe now

In case you missed it, I shared recently:

• The Most Sleep Well Investment Of LATAM.

• Sleep Well Portfolio Sept Update.

Thank you for reading. If you have found my content value-added, subscribe and spread the word so more long-term investors can sleep well.

Share

Leave a comment

Share Sleep Well Investments

Reminder: How can Sleep Well Investments help?

1. High success rate stock picks—33% money-weighted gain per pick since Oct 2023 (61% time-weighted).

2. Deep research of high-quality businesses and regular tracking. Buy and verify.

3. Free samples of deep dives, tracking updates, and buy alerts.

4. Free articles on investment framework to help find quality companies and execute with discipline.

5. Promote yourself to 6000+ stock market investors (47% open rate) — Contact me: trung.nguyen@sleepwellinvestments.com

Disclaimer

As a reader of Sleep Well Investments, you agree with our disclaimer. You can read the full disclaimer here.

Build your Sleep Well Portfolio today

Hi, fellow sleep well investors,

I hope you are enjoying Sleep Well’s 33% average money-weighted return (61% time-weighted) since October 2023.

Sleep Well Investments was initially built on the ideas of three wise investors:

• Anti-fragility borrowed from Nassim Taleb,

• Irreplaceability from Anthony Deden,

• Mundanity from Matthew McLennan.

Today, I want to bring your attention to Ralph Wanger, who compounded 16% over 30 years (1970 to 2003) at Acorn Fund. He specialized in growth at a reasonable price strategy (GARP) in small caps ($250M-$2B) and beat the S&P 500 by 4% each year.

When portfolio managers in the US some years ago voted on who they would prefer to manage their own money, his name was their top choice. Warren Buffett came second. Ralph Wanger was also the first to receive Morningstar’s Fund Manager’s Lifetime Achievement Award.

He wrote A Zebra Among The Lions, an easy investing book packed with practical tips. Here is my favorite quote:

“If you want to stand out from the pack, you have to stand outside the pack”.

Wanger was a zebra who ventured further out in lion country than most, and what spectacular results the walkabout gave.

In this book, he shares standout lessons that apply to Sleep Well Investments philosophy.

Read more

Build your Sleep Well Portfolio today

Hi, fellow sleep well investors,

I hope you are enjoying Sleep Well’s 33% average return per pick since October 2023.

Sleep Well Investments was initially built on the ideas of three wise investors:

• Anti-fragility borrowed from Nassim Taleb,

• Irreplaceability from Anthony Deden,

• Mundanity from Matthew McLennan.

Over time, I have continued to seek the right investing knowledge from others.

Today, I want to bring your attention to Terry Smith's timeless wisdom. He is the fund manager of Fundsmith, which has compounded 15.1% return vs. 11.9% of the index since 2010.

He is often known as the British Warren Buffett. You can read his famous Owners Manual here and Top 10 Holdings here.

To keep it simple, I have summarised my learning into FIVE points.

1. Buy great businesses and let them do the compounding.

2. Choose the quality of the business over the cheapness of stock.

3. Return on invested capital is a better value creation metric than earning per share.

4. A high reinvestment rate at a high ROIC is better than buyback and dividends.

5. Pay up for quality; it’s worth it. (hardest lesson)

   Subscribe now

1. Buy great businesses and hold on long enough for them to deliver the benefits of their investments.

Great businesses can consistently create value by generating positive returns on invested capital (ROIC) above their cost of capital (WACC). As they can reinvest their excess cash effectively, their ability to earn increases, making them more resilient in economic downcycles. On the contrary, bad companies destroy value because their return on capital is negative, i.e., every dollar they invest loses more money.

‘Buy great business and hold on to them’ —sounds easy, but there are caveats.

Firstly, you must hold them long enough for their investment to bear fruit.

Secondly, a business generating high ROIC quickly attracts competition and invariably finds its ability to earn a high return on investment eroded. Thus, at Sleep Well Investments, we go the extra mile to track and analyze competition and determine if our picks can sustain high earnings long-term.

One of our most recent examples is Sea Limited [deep dive, buy alert, latest update]. Even though it is already the eCommerce leader in Southeast Asia with a 50% market share and the largest online gaming publisher in the region with 650M quarterly active users, Sea Limited is still reinvesting most of its excess cash flow in its fintech division, SeaMoney, and its in-house logistics, SPX, to provide frictionless commerce, superior cost savings, and quality services compared to competitors (old guards: Lazada, Tokopedia, Tiki, and new entrants: Temu, Tiktok).

So far, the investment is working. The fintech arm is already generating $660M of free cash flow, a third of the total amount, and there is roughly 300M unbanked users in the region to capture, what’s better than leveraging its gaming and e-commerce leading market position. Meanwhile, the logistic investments since 2019 have made it the second-largest third-party logistic player behind J&T.

I believe Sea Limited has ample opportunity to reinvest efficiently. Management has proven capability and owns enough shares to lose sleep if they don’t. Still, as Terry Smith noted, the hard part is to keep owning [and verifying] the business until we see SeaMoney and SPX generate free cash flow durably and consolidate as the dominant force in the region.

2. Quality > Value

The next lesson I learned from Terry Smith is to favor the business's quality over the stock's cheapness.

For many years, I did the opposite, buying companies at a cheap valuation and believing that one day, their share price would revert to the means, the business would turn around, or the management would make some miraculous changes. Some did, but in hindsight, perfect timing was required to succeed.

The reality was that these businesses were cheap for a reason, especially when they were cheap over an economic cycle. They have no moats over competitors (scale, network effects, switching cost, brand), operate in industries that consumers can defer buying during downturns (like leather jackets), or have a business model that offers little control over pricing or input costs.

In the 1989 Berkshire Hathaway shareholders’ letter, Warren Buffett said:

“In a difficult business, […] never is there just one cockroach in the kitchen. The original ‘bargain’ price probably will not turn out to be such a steal after all. Any initial advantage you secure will be quickly eroded by the low return that the business earns.

“For example, if you buy a business for $8 million that can be sold or liquidated for $10 million and promptly take either course, you can realize a high return. But the investment will disappoint if the business is sold for $10 million in ten years and in the interim has annually earned and distributed only a few percent on cost.”

Charlie Munger adds:

"As the old saying goes, there are only two types of investor: those who can’t time the markets, and those who don’t know they can’t time the markets"

“Time is the friend of the wonderful business, the enemy of the mediocre.”

The chart below illustrates that low-quality businesses consistently generate low profitability over time (green line). Energy, utilities, airlines, and discretionary retail companies come to mind. It's just too competitive or too capital-intensive to make it profitable over the cycle.

But it’s never quite simple to separate the good from the bad.

Good companies are not immune to bad periods and are negatively affected by economic downcycles. Their share prices might drop by 40%, often driving people to change their opinion of a business’s quality.

Moreover, on an upcycle, everyone benefits from an economic recovery, disguising the bad companies from the good.

By reading Sleep Well Investments, you are on the right track to learn how to select good ones, and I hope you have found a few from our list.

We have recommended 15 high-quality businesses. Their stats exude quality:

• average ROIC is 17%, most with a long reinvestment runway.

• average free cash flow per share growth is 21% in the past three years, and

• average total share return has been 33% per year since IPO.

Why do we own high-quality companies?

It’s the comfort of knowing they can create value over time as they consistently generate ROIC higher than their WACC (cost of capital). Effective reinvestment allows these businesses to weather downturns, overcome competitive pressure, and thus help you to sleep well.

So, the lesson here is that if you can’t time the market (or know you can’t) and are a long-term investor, choose quality over value.

3. Return on invested capital is a better value creation metric than earning per share.

The third lesson I learned from Terry Smith is that earnings per share (EPS) is often mistaken for value creation. He argues it can be ‘sugar coated’ with acquisitions, cost-cutting, and share buybacks.

While these are all legitimate ways of improving EPS and making a company's fundamentals look good, there are only so many costs and shares you can cut and buy back, and value creation through acquisitions requires a disciplined and decentralized capital allocation process that only a few can execute.

As a result, Terry Smith prefers focusing on high ROIC businesses. Why?

Companies that can consistently generate higher returns than their cost of capital have no limit to the value they can create. This means they can compound their earnings until the reinvestment opportunity dries up.

Sleep Well Investments have a few of them.

Fortinet [deep dive part 1, part 2] and Wisetech have only 4% of the market share [deep dive part 1, part 2], Kinsale has just 2% [deep dive], and MIPS has a new market larger than the existing one to implement its brain protection technology [deep dive]. Meanwhile, Sea Limited’s markets still have over 300M people who have not used its e-commerce and fintech products [deep dive].

So, the key takeaway is that ROIC should be used instead of EPS to identify a high-quality business. A company can destroy shareholder value even if it consistently increases its EPS, which brings us to the fourth lesson.

4. Reinvestment rate > Buyback > Dividends

Similarly, suppose you have found a business that can reinvest effectively. In that case, Terry Smith would prefer that the company continue allocating its excess cash to reinvestment (organically > inorganically) rather than buying back shares and paying dividends.

Constellation Software (CSU) and Berkshire Hathaway (BRK.A, BRK. B) are prime examples. They’ve never paid dividends because Mark Leonard and Warren Buffett knew they could reinvest earnings at a higher return.

If they do pay a dividend, investors will have a less-than-optimum outcome as they would have to pay taxes on the dividend and then use that dividend to reinvest it elsewhere, incurring further transaction costs. Hence, it’s better to let both companies reinvest all their excess cash in the first place.

This is also why investing in stocks is better than investing in bonds, which return a fixed amount of earnings each year, and real estate, which pays you fixed rents and cannot reinvest in the property as a company can.

Walk with me over this example:

Three companies, A, B, and C, generated $100 profit in year 0. The following ten years:

• Company A reinvests 50% of the $100 earnings at a 20% return rate.

• Company B doesn’t reinvest.

• Company C reinvests 50% of the $100 earnings at a -10% loss rate.

The result is Company A was able to generate an annual profit of £259/year by year 10, while Company B's earnings power remains at £100/year, and Company C manages only £60/year. In other words:

• Company A created more value by compounding its earnings.

• Company B stood still like a bond investor receiving a bond coupon.

• Company C destroyed value by reinvesting in loss-making projects.

Hence, the ability to effectively reinvest back into the business is a big reason why stocks can compound over time and why some companies create more value than others.

Of course, picking winners is tough. Only 4% of global stocks (2,200 companies out of 55,000) create most of the wealth in the stock market. And high ROIC industries attract competition, which erodes ROIC over time. So, you must be highly selective and know which company is best positioned to defend its ability to reinvest at a high rate effectively.

The good news is that the dislocation of value creation creates opportunities for committed investors. Reading my blog helps 🎯.

To give you a head start, here is a list of 15 sleep-well businesses I have deep-dived into. You will find 90% of what you need to know about their business model, competitors, challenges, and how they can reinvest effectively to maintain/grow their market position. All links to writeups are here.

5. You must pay up for quality

The last lesson is the hardest lesson to implement—for me, anyway. It’s paying up for quality. Why is that?

Investing in a quality company requires a longer time horizon, as the company may take years or decades to realize the result of the invested capital. Even so, it may not be, so you need to understand the competitive landscape well. Moreover, you often pay for a high multiple in the first place.

Since starting Sleep Well Investments, I have already made two significant errors. One was not buying Wisetech [deep dive, update] in January at $70/share because it was trading at 70x FCF; now it’s $125/share. The other was selling VAT Group [deep dive] at $370/share last year for a quick 70% return; now it’s $450/share.

The following takeaway from BCG and Morgan Stanley research brings it home.

Valuation matters much less over time, 5% to be precise. In contrast, sales, profit, and free cash flow contribute 95% of the stock's performance over the ten years.

Charlie Munger put it nicely.

“Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive-looking price, you’ll end up with a fine result.”

Fortunately, I have made eight good purchases (see below) so far, but I don’t want to miss out on outstanding businesses because they appeared expensive in the first year of ownership.

Below is the current ownership of the Sleep Well Portfolio [update monthly]. I look forward to adding more outstanding businesses in the future.

Terry Smith taught me a lot more, and you can learn from him for free below.

Thank you for reading. If you have found my content value-added, subscribe and spread the word so more long-term investors can sleep well.

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I hope some of these examples will help your investment process too.

Jeff Bezos @JeffBezos

• It is always Day 1

  There are many ways to center a business (competitor-focused, product-focused, or technology-focused). In my view, obsessive customer focus is the most protective of Day 1 vitality. Why? Customers are always beautiful, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and your desire to delight customers will drive you to invent on their behalf. No customer ever asked Amazon to create the Prime membership program, but it sure turns out they wanted it, and I could give you many such examples. Staying Day 1 requires you to experiment patiently, accept failures, plant seeds, protect saplings, and double down when you see customer delight. - 2016 Shareholder Letter

  

• What’s Day 2?

  Day 2 is stasis. Followed by irrelevance. Followed by an excruciating, painful decline. Followed by death. And that is why it is always Day 1.

• Customer value = shareholder value

• Share scaled economies

• Customer value = shareholder value

• It's All About the Long Term

• A Dreamy Business Offering

• FCF Per Share

• Focus on quality - Charlie Munger

“You can identify certain business momentums in the real world that aren’t necessarily in the financials and allow for sustained returns on capital

Munger spent no time focusing on the balance sheet, income statement, or earnings multiples. Rather, he spoke almost exclusively about qualitative factors, such as economies of scale, universal appeal, and a strong brand that helped turn Coca-Cola into the world’s most dominant beverage company.

• Fat pitch - Email conversation between Warren Buffett and Jeff Raikes (MSFT)

I’ll add more resources as I go, so do share with your friends, subscribe & check back :)

I learn a bunch from fellow investors on Substack, X (formerly Twitter), and Seeking Alpha - so when I come across useful resources, I’ll link them here to share with others.

Industry primers

Dropbox link, Google link

Cyber security - Beginner’s guide, CISO insights, SASE, MSFT

Moats

Charlie Munger often spent most of his time discussing the qualitative aspect of a business’s universal appeal, economies of scale, and other moats rather than the numbers everyone could see.

• Distribution - “Superior sales and distribution by itself can create a monopoly, even with no product differentiation.”- Peter Theil - by The Nomad Investor

• Moats, according to Morning Star

Valuation

Lessons from Professor Aswath Damodaran

1. Valuation is simple. We choose to make it complex.

2. Valuation is more about the story than about the numbers.

3. Valuations go bad because of biases, uncertainty, and complexity.

Lessons from Joel Greenblatt

Sleep Well Investing Pillars

At the core, the Sleep Well Investments process/checklist is adapted from

• Anti-fragility concept borrowed from Nassim Taleb,

• Irreplaceability from Anthony Deden,

• Mundane businesses from Matthew McLennan,

• Clear thinking from Chris Mayer

• Equity compounders from Morgan Stanley

The above are interviews. You can also find more resources on their websites, biographies, and books. I’ll link them here once I get a chance.

• Lindy effect from Nassim Taleb - demonstrated by Toby Ord

the longer something has been in business, the longer it will remain in business […] even when the object itself is not becoming more robust over time.

• Fewer losers, more winners from Howard Marks's risk control is the number one rule at OakTree. Howard often asks analysts to questions about their analysis:

How much money can I make if things go well?

What will happen if events don’t go as planned?

How much could I lose if things get bad?

And how bad would things have to get?

Howard made a lovely comparison of investing to tennis. In most amateur tennis games and even professional tennis, the play style that minimizes errors (instead of going for winners - risker shots) often wins Grand Slams (the biggest prize in tennis). Risk control wins.

Study the Downside

X (formerly Twitter) handles who help give out bear cases - in no particular order:

• White Diamond @WhiteResearch

• NINGI Research @NingiResearch

• Guasty Winds @guastywinds

• Friendly Bear @FriendlyBearSA

• Grizzly research @ResearchGrizzly

• The Bear Cave @BearCaveEmail @StockJabber

• Muddy Waters @muddywatersre

• Safkhet Capital @SafkhetCapital

• Hindenburg Research @HindenburgRes

• Spruce Point @sprucepointcap

• Viceroy @viceroyresearch

• Kerrisdale Capital @KerrisdaleCap

• Iceberg Research @IcebergResear

• Culper Research @CulperResearch

• TheUndefinedMystic @pennycheck

• Quintessential Capital Management @QCMFunds

Others

• Playing the long game - find ROIC machines by Ensemble Capital.

• Why does competitive advantage die? - Morgan Housel >40% of all public companies lose all value.

• How Long Does A Bear Market Last? - Ben Carlon (A Wealth Of Common Sense), the history of S&P 500 bear markets since 1950.

• The Lindy effect from Toby Ord, the longer something has been in business, the longer it will remain in business. "it is possible to have a Lindy effect even when the object itself is not becoming more robust over time."

• Growth is tough! - McKinsey study - Only 13% of the company can grow revenue by 10%+ CAGR over 10 years preceding COVID (23% for inorganic growth and 6% organic)

• Why is hard to predict the future - A piece written by an officer in the White House, cced to George W Bush before he planned the US defense strategies.

I’ll add more resources as I go, so do share with your friends, subscribe & check back :)