Annual Review 2025
December was a strong month for equity markets, with the Stockholm Stock Exchange (OMXSGI-PI) rising by 2.3% and the global equity index (Dow Jones World Index) up 0.9%. Full-year performance was also positive, with the Stockholm market gaining 12.8% and global equities rising 20%.
Below the index this year, but clearly ahead over the long term
Kavaljer Investmentbolagsfond delivered a decent, though far from outstanding, performance. After fees, the fund rose by 5.6% during the year. Since the fund’s inception in July 2018, total performance amounts to 152%, compared with 119% for the Stockholm Stock Exchange and 89% for the global equity index.
The book Fooled by Randomness by Nassim Nicholas Taleb explores how humans tend to mistake luck for skill and underestimate the role of randomness in our lives—particularly in finance and business. The reason is that we often, quickly and without reflection, link outcomes to execution or process, assuming that a good result must be the consequence of good execution.
This makes it easy to appear like a genius when one happens to be in the right place at the right time (think of the CEO of any e-commerce company during the pandemic). In short, regardless of what one did (process), the outcome was strong growth and improved profitability.
In 2025, the “right place” has been large-cap stocks, defense-related companies, or, more broadly, the so-called “picks and shovels” of artificial intelligence.
Conversely, it is just as easy to look incompetent when one has a sound process but happens to be in the wrong place at the wrong time—at least over the relatively short evaluation periods investors are typically judged by.
The “wrong place” in 2025 has been small-cap companies with currently weak profitability and growth. Software companies have also been out of favor, as the prevailing narrative suggests that AI will entirely eliminate barriers to entry and that all existing software will a) be outcompeted and b) face severe pricing pressure from newly founded companies whose creators have simply told an AI bot to “build a smart software solution for industry X” (sarcasm intended).
Sometimes, as investors, we are in the right place at the right time—but often we are not, at least not over the short time horizons on which we are typically evaluated.
When a large number of investors—the “market”—find themselves in the wrong place, the market’s conclusion is that something must have been wrong with the execution or process itself. As a result, the stocks that underperformed come to be associated with “bad” companies. The new “normal” P/E multiples for these companies are lowered, as their perceived quality declines relative to earlier expectations.
The opposite applies to companies that happened to be in the right place at the right time. These are instead perceived as high-quality businesses, with expectations of continued strong earnings growth indefinitely.
The common denominator is that current trends are extrapolated far into the future, as if they are here to stay. Eventually, investors who have “been wrong” give up on their holdings, sell them, and rotate into the “new” quality companies—the recent winners.
In reality, while current trends often persist in the very short term, history shows that over longer periods, “reversion to the mean” is far more common—that is, the belief that conditions prevailing over the previous decade are likely to reassert themselves.
This tendency to extrapolate current trends indefinitely is what creates “Mr. Market,” a term coined by Benjamin Graham (Warren Buffett’s mentor) to describe the market’s manic-depressive behavior. Mr. Market is either euphoric and loves everything about a company or deeply pessimistic and dislikes everything about it. Only for brief moments is Mr. Market neutral and balanced in its assessment.
The solution to avoiding becoming part of the market’s psychosis is to learn to trust one’s own process—something that is far from easy when falling share prices suggest that one must be wrong.
Our strategy: identifying and owning undervalued, high-quality investment companies, conglomerates and serial acquirers
We seek companies that are undervalued—or at least fairly valued—while maintaining a high level of quality.
For us, a high-quality company is fundamentally one that has the ability to grow earnings per share over time. In the case of investment companies, serial acquirers and conglomerates, this largely comes down to management’s ability to make sound decisions: allocating capital efficiently, pursuing a well-considered strategy, and ensuring that the right people are leading the business.
When assessing quality, we primarily start with the company’s financial track record and then analyze whether anything fundamental has changed that could alter its prospects going forward.
Why? Isn’t this approach too rigid?
We believe that financial history is the result of numerous underlying factors—corporate culture, ownership structure, competitive advantages, and more. Rather than listening to management narratives (where the CEO is, by nature, a salesperson of the company’s story), we focus on the numbers, which are often the clearest evidence of a company’s underlying health.
“History seldom repeats itself, but it often rhymes” — Mark Twain
If a company’s history points to high quality, the key follow-up question becomes whether anything fundamental has changed that would make the future materially worse.
Betting on “more of the same” — because turnarounds seldom turn
In investing, it is tempting to be drawn to stocks that have fallen significantly. The argument often goes that “if the company just does X and Y, the stock should be worth multiples of today’s price.” In short, investors bet on a turnaround and expect to be richly rewarded.
Warren Buffett famously said: “Rule number one is don’t lose money. Rule number two is never forget rule number one.” A cornerstone of this philosophy is avoiding turnaround situations. The reason, according to Buffett, is simple: “turnarounds seldom turn.”
Instead, both Buffett and we prefer to bet on “more of the same.” We look for businesses where nothing dramatic needs to happen and no major strategic shifts are required. The goal is simply for the company to continue operating in the same manner as before—steadily and consistently—trusting that, over time, this approach will be rewarded.
Price vs value
The principle that a company can simply continue operating in its current manner and thereby deliver strong share price performance is, of course, not a given. Everything depends on the price paid for the company—since price (the share price) often differs
from value (the sum of the company’s future cash flows discounted to today).
”Price is what you pay, value is what you get” - Warren Buffet
In cases where this principle holds, attractive investment opportunities often arise because the price may not appear low at first glance—yet this perception can change over time.
The same can also apply to companies that appear cheap because the market has placed them in an overly pessimistic category—effectively equating them with low-quality businesses despite clear evidence of higher underlying quality.
The “double whammy” effect creates opportunities in investment companies
What makes the valuation of investment companies particularly interesting is that they are often either doubly rewarded or doubly penalized—a so-called “double whammy”—when the performance of their underlying holdings improves or deteriorates.
During periods of headwinds for portfolio companies, the investment company is affected in two ways:
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The underlying holdings decline in value, and The discount widens (or the premium narrows, where applicable), as the market simultaneously perceives the investment company as less attractive.
Conversely, during periods of favorable conditions: The holdings appreciate, and The discount narrows (or the premium increases), as the investment company is perceived as higher quality and becomes more sought after.
This “double whammy” effect can create compelling investment opportunities, both in rising and falling markets.
A clear example is the investment company Bure, which has historically traded at a relatively high premium but is now trading at a discount following weak performance in several portfolio holdings. Other examples include BB Biotech and Svolder, which we discuss in more detail later in this letter.
Contribution to fund performance
The largest positive contributors to the fund’s performance during the month were Fairfax Financial Holdings, HBM Healthcare Investments, and Investor, contributing +0.4, +0.3, and +0.2 percentage points respectively. The largest negative contributors were Berkshire Hathaway, Prosus, and Microsoft, detracting -0.3, -0.2, and -0.13 percentage points respectively.
Portfolio changes
During the month, we increased our holding in Bure Equity. Later in this letter, we provide more in-depth discussions of our healthcare-focused investment companies, as well as Svolder and Sonae. A brief summary of these discussions follows below.
Healthcare theme
The healthcare and biotechnology sector has been under pressure due to rising interest rates and increased uncertainty, leading to lower valuations and more challenging capital markets.
At the same time, this environment creates opportunities for companies with strong balance sheets and investment capacity. Our holdings BB Biotech, HBM Healthcare, and Linc are well positioned to act while valuations remain depressed. With signs of increasing transaction activity, we see solid potential for both portfolio values and narrowing discounts to net asset value going forward.
Svolder
Svolder reported its Q1 results, with net asset value per share declining by 0.6%, compared with a 0.2% increase for the Carnegie Small Cap Return Index. For the full year 2024/25, NAV was essentially flat (+0.3% including dividends), while the index declined by 4%.
The valuation gap between small- and large-cap companies is now the widest since the global financial crisis. Combined with potential interest rate and tax cuts, this creates a more favorable backdrop for small-cap stocks in 2026. Svolder is particularly attractive as it currently trades close to NAV (approximately a 0.1% discount), compared with a five-year average premium of 6.4%.
Sonae
Sonae is a Portuguese investment company with operations in retail, real estate, telecom/technology, and other investments. Its core holdings primarily consist of MC (grocery retail, ~45% of NAV), Sierra (European shopping centers, ~20%), and NOS (telecom, ~12%), all of which hold strong market positions and are performing well.
Management currently prioritizes reinvestment within the existing portfolio over share buybacks, while maintaining strong capital discipline through reduced leverage (13.6%) and improved operating metrics across core holdings.
Overall, we view Sonae as a well-managed company with a high-quality portfolio, where the substantial discount to NAV has strong potential to narrow over time—while share buybacks would be an attractive complement at current levels.
Despite NAV growth of 9.1% in Q3, the shares trade at an approximate 40% discount to NAV and offer a dividend yield of 3.7%.
