Finding Quality Stocks in Helsinki

In a previous blog post describing my investment philosophy I explained that I try to invest in companies of highest quality. But how to measure the quality of a company? There are many ways of course, such as looking at the strength of the balance sheet, competitive advantage or track record of management. There are also various equity research institutions which provide metrics and rankings to measure the quality of different companies.

However, I came up with another interesting data point to look at. I have a margin account with my stock broker, Nordnet, where I hold Finnish stocks. This means that they will lend me money to buy shares, and any shares I own will be used as collateral for the loan. The stock broker has internal metrics for calculating how safe the stock of each company is, and the value for collateral is different for each company. For example, if the company is considered really safe and stable, the bank may accept 80% of the value of the position as collateral. If the company is really risky, they may accept only 30%. They will tweak these values if there are significant changes in a company, but they appear to be relatively stable.

Why is this such an interesting metric to look at? The business model of a stock broker is to earn commissions on trades and sell other services for fees. Generally they do not want to speculate which stocks go up or down, in other words they do not want to take on risk if they can avoid it. The collateral value gives us some idea of what they think a stock is worth in a worst-case scenario. This means they are putting their money where their mouth is, or in other words, risking their own money in proportion to this figure that they state. Meanwhile they will hype and advertise the IPOs of hottest tech stocks all day long but they will not lend money against their shares. Interesting isn’t it? Lets look at Rovio, for example, which went public about 3 months ago. The broker is accepting only 20% of the value of Rovio shares as collateral, which means that in a worst-case scenario the broker thinks the fundamental value of Rovio is only 20% of what it is currently trading at.

But enough about Rovio, lets get to the quality names that this blog post is about. All the links for the companies lead to the Investor Relations sections of their website.

Grade A (collateral value 85%)

These companies, according to the broker, are the safest and highest quality listings traded in Helsinki. If one were to build a portfolio consisting of just these stocks, I expect that investor to sleep well at night. There are two telecomm stocks (Telia and Elisa), so maybe owning both is not necessary. Kesko is a stable consumer goods company, one of two large companies that sell food and other necessary items in our duopoly. I think not many will disagree with my opinion that Kone and Wärtsilä are the highest quality industrial stocks we have in Finland. Sampo is our leading financial services company and Fortum is an electric utility which is not going anywhere. The only company in this list that has been struggling lately is Telia, but their share price seems to have bottomed between 3.5 and 4 euros.

Grade B (collateral value 80%)

This second group is very interesting. These companies are still of very high quality, but not quite as rock-solid as the first group in the opinion of my stock broker. Each of these companies has some specific risks which I suspect landed them in the second group. For example, Nokian Tyres has some exposure to Russia which has risks. Metso is heavily exposed to the mining sector and their share price got crushed along with the share prices of mining companies at the start of 2016. Neste has strong dependency for government subsidies in biofuels. Orion is vulnerable to expiring drug patents. Nordea is undergoing a large upgrade of their tech/software infrastructure. And being the largest bank in Scandinavia has lots of regulatory risks as well. Tieto is the largest software company in Finland, but software is an area that is easily disrupted and Tieto is very dependent on government/municipality contracts. Overall I would stay these are very good companies to own, but one should be aware of some company-specific risks.

Grade C (collateral value 75%)

Companies that belong to the third group are, according to my stock broker, slightly more risky than the first two groups. If I try to look for a common thread among these names, I think their competitive advantage is weaker than any companies in the first two groups which means they are more susceptible to disruption by competitors. They seem to lack a “moat” as Warren Buffett calls it. I don’t personally own any companies from this group. Going back to my investment philosophy, I said I wanted to own the highest quality companies, and those are found in the first two groups.


I found this method of ranking stocks particularly interesting because I had already formed some opinion about the quality of different companies through research and other methods, and I found there was a very strong correlation with how my stock broker ranked these companies. This strong correlation definitely surprised me. Of course, one should not buy stocks based on this list alone, but it does serve as an interesting data point to consider.

But lets say, for the sake of argument, that one would construct a portfolio using this list as a guide. A rough rule of thumb would be to own all the companies from group A, half of the companies from group B and maybe one or two from group C. This would result in a fairly safe and defensive portfolio, perfect for an investor who is interested in protecting the invested capital and not chasing quick profits.

Oh, you might be wondering where is Nokia? They did not make the list as my stock broker would rank them in group D that I did not include here. Apparently they see Nokia as a fairly high risk business. It is currently my only position that is not included in this post.

Book Review: The 10X Rule by Grant Cardone

I must admit, I struggle to read books. It is so easy to get distracted with other things such as YouTube. Don’t get me wrong, there is plenty of valuable content in video format, but there is something special about reading which engages the brain in a different way. After hearing over and over that successful people read books I realized it is something I must do, there is just no way around it. Writing a short review of a book that I have read is a good chance to reflect on what I have learned.

The 10X Rule

The 10X Rule is a good introduction to the philosophy of Grant Cardone. He argues that people should set 10 times bigger goals, and then take 10 times more actions to achieve them. While the basic concept is easy to understand, the book goes in-depth, explaining why it makes sense and how it can be used to improve the life of a success-oriented individual. The basic premise is that generally people do not dare to dream big, and if they do, they do not dare to take large enough actions to make those dreams come true. I think a lot of this aversion to making big actions is due to peer pressure and wanting to “fit in”. The book makes the argument for the opposite, that obscurity is really the largest issue companies and products face, and the goal should be to stand out.

Success as Ethical Issue

One interesting argument the book makes is that aspiring to be successful is an ethical issue. That is, it is unethical if a person does not try to achieve their full potential, or intentionally achieves less than they are capable of. I had never considered success as an ethical issue before reading this, but it is a very powerful idea. If a person is capable of making a positive contribution to the planet, however way he does it, then it could be argued that the community is worse off when it does not receive the full contribution that the person is capable of giving. This is another way of coming to the conclusion that we should always try to do our best and strive to make a positive contribution to the planet we live on.


Another idea from the book is that a person aspiring to be successful must learn to take responsibility for everything. One activity that most people spend considerable time on is to blame others for their condition instead of taking responsibility for their own life and making an attempt to improve it. But blaming others does not move the ball forward when it comes to improving your life, instead it is a mindset of surrender. By giving other people and entities the blame for your condition has the side-effect of implicitly also giving those external entities the power to improve your life by surrendering your own responsibility. I know, as I have been living in this victim-mindset most of my life. Mr. Cardone argues in the book that we should in fact go the other way, and take responsibility for everything, even things that are not really our fault. This thinking establishes a positive mindset where a person feels in charge of their life and destiny.

Fear and Uncomfort

Human beings have a tendency to want to be comfortable and our subconscious mind seems to direct us towards that, almost automatically. Experiencing fear is one of the most unpleasant feelings we can have. The problem is that it is not possible to move to the next level in our lives by staying where it is comfortable. Comfort implies that we are dealing with familiar people, living in familiar surroundings, and performing work that has become routine. To improve our lives in a meaningful way, we must be willing to be uncomfortable. Grant argues that fear and uncomfort should in fact be taken as indications that we are on right path. They should be embraced, not avoided, because conquering fear and uncomfort allows us to grow and reach the next level. Whenever I think of fear I always remember the great quote, “There is nothing to fear but fear itself.”.

Commit First – Figure Out Later

For me personally, the most important thing I learned from the book was the idea of committing to something first, and only then figuring out how to make it happen. Initially this feels counter-intuitive because at least my brain attempts to figure if something is possible, or how to do it, before committing to an idea. But I have observed something really interesting regarding this. When I try to think of ways to do something before committing to it, my brain tends to work against me, and come up with reasons why not to do it. I tend to think of problems, not solutions. But as soon as I have committed to something, my brain automatically starts to find solutions on how to make it happen. Now the question is not if, but how. This is extremely fascinating to me and I have to stay this understanding has helped me greatly.


I think this is a good book and I highly recommend it to anyone who is interesting in improving their life and expanding their thinking. Have you ever caught yourself wondering whether you deserve to be successful? If the answer is yes, you should read this book, as it gives you permission to be successful. In fact it goes further and states that success is your duty, obligation and responsibility.

Three Decisions of a Business

There are three main decisions that any business entity must make. These apply whether we are talking about a single enterpreneur or the largest corporations on the planet. Most other business considerations usually fall under one of the three main ones. The purpose of a business entity is to create value for their shareholders and these three decisions determine whether value is created or destroyed. The situation is a little different for non-profit organizations, but not much. Just like for-profit business entities, they face the same optimization problem of how to use their resources as efficiently as possible.

Investment Decision

The investment decision determines how the resources of the entity should be allocated in order to generate the highest return on investment. Hiring a new person, expanding to a new location or creating a new product are all examples of investment decisions. A business entity has a hurdle rate which represents the minimum return on investment that it must earn for the investment to make sense. This hurdle rate is often same as the cost of capital for the business. This makes a lot of sense, because if the cost of funding the investment is higher than the return it generates, the investment will not be profitable.

Shareholder value is created when a business entity makes investments that generate higher return than their cost of capital. Conversely value is destroyed if the business makes investments that generate lower return than their cost of capital. It is important to realize that investments should not be made just because they have a positive return, but only when that return exceeds the hurdle rate.

Financing Decision

The financing decision determines how the operations of the business should be financed. There are basically only two ways to finance a business: the shareholders can use their own money (equity) or the business can borrow money (debt). The decision whether to use equity or debt, and to what proportion, is based largely on the cost of each type of capital. These are known as cost of equity and cost of debt which together make up the cost of capital for the business.

Shareholder value is maximized when the business has optimal capital structure which minimizes the cost of capital for the business. Value is destroyed when the business is not financed efficiently. This could happen for example if inexpensive debt is available but it is not utilized.

Dividend Decision

The dividend decision determines how much of the profits that the business earns should be distributed back to its shareholders. Many companies also buy back their own shares, but that is just another way to return capital back to the shareholders. The decision to pay dividends should be based on what kind of investment opportunities the company has compared to what kind of other investment opportunities the shareholders would have if the dividends were paid out. Generally new companies should not pay dividends when they are in a phase of strong growth, while mature companies that are not growing much anymore should begin to return capital to shareholders.

If a business has investments available that generate high return, paying dividends would likely destroy shareholder value because they are unable to use that capital as efficiently elsewhere. However, if the business cannot find investments with adequate return, it is in the interests of the shareholders that the profits are paid out so that they can be invested in other companies where that capital can be employed more efficiently. Yes, there is such a thing as having too much money and when that occurs it is said the business is overcapitalized.


Some of this information may seem obvious, but I find it is still helpful to put it into words with proper definitions and really think about it. I suspect this is something many small business owners understand subconciously, but do not necessarily think about conciously. Every business owner should have at least some figures for their cost of equity, cost of debt and hurdle rate, even if they are rough estimates. I would suggest that the investment decision is by far the most important for small business owners and that is where they should spend most of their time. That is what makes or breaks a business.

To sum things up, a successful business is one that:

  1. Makes investments that exceed its cost of capital by a good margin.
  2. Has access to financing and uses debt and equity in correct proportion.
  3. Pays dividends only when no suitable investments are available, but does not hoard cash either.

To close this post, I have to acknowledge Aswath Damodaran as a big contributor to my understanding of corporate finance. He has a lot of free content available on his website and YouTube, so if you wish to learn more, check him out.