Year in Review 2025
December was a strong month for equities, with the Stockholm Stock Exchange (OMXSGI-PI) rising by +2.3%, the small-cap index (CSXSR) by +0.3%, and the global index (Dow Jones World Index) by +0.9%.
The full year also developed positively, with the Stockholm Stock Exchange up +12.8%, the small-cap index +1.9%, and the global index +20.0%. The year’s outperformance of large caps compared with small caps was record-breaking, and a muted interest in small-cap funds has led to outflows that have pushed down share prices in already depressed small-cap stocks.
Perfectly fine for swimming against the current
Kavaljer Quality Focus developed reasonably well, though far from fantastically. After fees, the fund rose by 10.6%, i.e. 2 percentage points below the Stockholm Stock Exchange as a whole, but still almost 9 percentage points better than the small-cap index. Since small companies make up a large part of our primary hunting ground for existing and new holdings, it is fair to say that we have been swimming against the current during 2025.
Over a five-year horizon, the fund’s performance is +67%, compared with the Stockholm Stock Exchange at +58%, the small-cap index at +20%, and the global index at +55%.
Luck and themes win in the short term, but the right process wins in the long term
The book Fooled by Randomness by Nassim Nicholas Taleb discusses how we humans tend to mistake luck for skill and how we underestimate the role of randomness in our lives, particularly in the world of finance and business. The reason is that we often quickly and without reflection link outcomes to execution/process, i.e. that a good result must be due to good execution.
This makes it easy to look like a genius when you have been in the right place at the right time (think of the CEO of any e-commerce company during the pandemic). In short, whatever you did (execution/process) resulted in high growth and improved profitability (outcome).
The right place during 2025 has been large-cap stocks, defence-related companies, or why not “picks and shovels for AI”.
Just as easily, one can look foolish for having been in the right place (good execution/process) at the wrong time (the outcome was poor), at least over the evaluation period in question.
The wrong place during 2025 has been small-cap stocks, and in particular those small companies whose profitability and growth are currently weak.
The effect of a large number of investors, i.e. “the market”, having been in the “wrong place” is that the market concludes that it has actually “done” something wrong, i.e. that there was something wrong with the execution/process. The consequence is that the shares that have been “wrong” cause the companies behind them to be viewed as “bad”. The new “normal” P/E multiples for these companies have now been lowered as the companies are perceived to be of lower quality than previously assumed.
The same effect applies to the companies that have been in the right place at the right time. These companies are instead perceived as high quality, with expectations of continued high earnings growth forever.
The common denominator is that the trend is extrapolated, i.e. the current trend is assumed to be here to stay. The effect is that investors who have “been wrong” eventually give up on their holdings, sell them, and then buy the “new” quality companies, i.e. the winning stocks. In reality, it is true that the current trend is here to stay – at least if you look at the very short term. Over the longer term, however, “reversion to the mean” is much more common, i.e. the belief that what applied during the ten years prior to this year will likely return. This tendency to extrapolate the current trend indefinitely is what creates “Mr. Market”, the term coined by Benjamin Graham (Warren Buffett’s teacher) to describe the market’s manic-depressive nature. Mr. Market is simply either manic and loves everything about a company/share, or depressive and hates everything about a company. For very brief periods, Mr. Market is neutral and thus “balanced” in his analysis.
The solution to not becoming part of the market’s psychosis is to learn to trust your own process – which is, however, not easy when the market (through falling share prices) tells you that you have been wrong.
Our strategy: finding and owning undervalued quality companies
Our strategy is to find and own undervalued, or at least reasonably valued, quality companies. Our primary definition of a quality company is “the ability to grow earnings per share over time”.
Our main way of assessing a company’s quality is to evaluate its financial history – and then assess whether anything fundamental has changed.
Why? Isn’t this very rigid?
We believe that financial history is the result of a multitude of underlying factors; corporate culture, ownership structure, moats, etc. So instead of only listening to a CEO (who is primarily a salesperson for the company’s story), we look at the numbers, which are most often the final verdict on how healthy a company really is.
“History seldom repeats itself, but it often rhymes” – Mark Twain
If the historical record indicates high quality, the follow-up question is whether anything fundamental has changed that would make the future worse. Of course, we also talk to and listen to management teams, but our point is not to be blindly swept along by a CEO’s enthusiasm about the future.
Bet on “more of the same” – because “turnarounds seldom turn”
In investing, it is easy to be tempted by stocks that have fallen sharply. The mantra is that “if they just do x and y”, the share should be worth many times today’s price. In short, a so-called turnaround is supposed to happen, and then one is richly rewarded.
Warren Buffett has said, “rule number one is don’t lose money, rule number two is never forget rule number one”. A cornerstone of this concept is not being tempted by the turnaround situations described above. The reason, according to Buffett, is simple: “turnarounds seldom turn”.
What Buffett, and we, prefer instead is to bet on “more of the same”, and that this will lead to good share price performance. That is, nothing special needs to happen and no major decisions need to be made; you simply want the company to keep grinding away in its current manner, and sooner or later this will pay off.
Price vs value
The mantra that the company should just keep grinding away in its current manner and that this should lead to strong share price performance is, of course, not a given. Everything depends on the price you pay for the company – since price (where the share trades) 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 Buffett
In cases where the aforementioned mantra applies, a good investment opportunity is often presented when the price does not look low at first glance – but this is about to change (e.g. Carasent in our portfolio).
It can also apply to companies that trade cheaply because the market has so far placed the company in a “too bad” category, i.e. equating the company with low-quality businesses despite the company having proven itself to be of higher quality (e.g. Svedbergs, Protector and FlatexDegiro in our portfolio a year ago, or Securitas today).
Sentiment shift in action – Svedbergs vs Inwido during 2025
A very telling example of sentiment shifts during 2025 is the comparison between Inwido and Svedbergs.
In our view, these companies are quite similar, with comparable cyclical exposure and both with strong financial histories. At the beginning of the year, however, the valuation gap was oddly large. Inwido had become a “darling” among funds and had gone from being a “boring and cyclical company” to a “compounder” or “serial acquirer”, and was considered to have a long period of strong, profitable growth ahead – trading at a P/E multiple above 20 on trailing numbers and P/E 16 on very optimistic 2025 estimates.
Svedbergs, on the other hand, was trading at around P/E 10 on reasonable or conservative 2025 estimates. We wrote in our February letter, “We believe that Svedbergs will, over time, move closer to companies like Inwido in terms of valuation, which is why we see continued strong upside.”
In hindsight, the outcome was even better than we had dared to hope for, with Svedbergs up +65% during the year, while Inwido is down -12% after having been as low as -25% just a month ago.
On trailing numbers today, Svedbergs trades at 18x earnings and Inwido at 17x. We now believe that expectations for Inwido have instead become too low, and have therefore repurchased the share and increased our holding around SEK 150. We have chosen to reduce our holding in Svedbergs, as we assess that the valuation is now more reasonable.
Largest holdings at the start of 2026 – Securitas & Carasent
Two of our three largest holdings as we enter 2026 are, on the surface and at first glance, very different. One appears to be a classic boring company that is unlikely to be a rocket, while the other appears, on the surface, to be an expensive hope-driven company. Below, we will go through why we believe these are simplified and incorrect perceptions, and which scenarios we believe will play out.
