About Me

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This is written with serious investors in mind, though sometimes they're just drafts in progress. I'm a former reporter, private investigator and institutional equity analyst who digs deep to find niche undervalued and undiscovered securities. I manage money for individuals, institutions and family offices via my business Long Cast Advisers. This blog is part decision-diary, part investment observations and part general musings about Philadelphia sports. It should not be viewed as a solicitation for business or a recommendation to buy or sell securities.

Monday, December 21, 2015

The patient investors' year end review (with add'l comments on $FRMO and $SEC.TO)

The end of the calendar year is upon us. A time to reflect on the prior year and ahead to the next with plans and "resolutions".  I wanted to take a moment to do the same.

I wrote 34 posts in 2015, starting with a review of Betterment for my sister and an observation about the how Wall Street and the Philadelphia 76ers both sell "the wonderous future" while delivering sub par results.

The year included commentary on 14 separate stocks by my count in various levels of detail and analysis. I write about what I like most and know best, observing that I wrote most frequently about ARIS, ESWW, FHCO, FLTF & STRL.

When I find new ideas to write about, I will. I don't know how this blog will evolve in the future but it has more than a handful of readers that are not robots (unless of course we are all robots). I continue to enjoy writing it and most importantly it helps me organize my thoughts.

Beyond the blog, this was the year that my company, Long Cast Advisers, achieved registration as an investment adviser in New York state and started taking clients. I opened an investment account under the name of the LLC during the year to start to establish a "professional track record". That account initiated investing in June 2015 and is up 11% as of this writing vs. the SPX - 4%, the RYO (Russell 1000) -5% and the RTY (Russell 2000) -11%.

The time frame for these results is too short to be relevant but I think the inputs reflects the themes and processes that are critical to the long term success as an investor, which are patience, in depth research and portfolio concentration.

As of this writing this "professional" portfolio is comprised of six stocks: ARIS, FHCO, FRMO, FTLF, SEC.TO,  and STRL. ARIS and STRL are the biggest contributors to gains and nothing has been a terrible detractor. In football parlance, turnovers kill drives and we've had no turnovers.

Two of these stocks - FRMO and SEC.TO - are very recent additions to the portfolio. I haven't written about them, because all they are are balance sheets and balance sheets are complicated in a boring sort of way. In this case, you just to read a bunch of filings. Both are investment managers, one trading at 2.5x book value the other at 0.6x.

The expensive one is managed by Murray Stahl and he needs no introduction. He writes on issues related to finance and trends in tradeable securities such as ETFs and the opportunities that arise when their algorithms are in phase. He also writes about specific stocks in a subscription newsletter I hear about. He thinks into the future and two specific investments on the balance sheet - exchanges, to be precise - attract me to the stock even at these multiples.

One is the Minneapolis Grain Exchange, which he started acquiring in 2014 and just had its highest volume month. He's also  been buying seats on the Bermuda Exchange because he says it's the largest market for Insurance Linked Securities.

These assets - and a few others - are readily discussed in his shareholder letters and quarterly reports. I think of exchanges like payment platforms that generate cash on the backs of someone else's hard work (though when I think about it, what business isn't a payment platform, and if it isn't, why is it in business?) These particular exchanges may be wonderful cash machines if the volumes continue to grow. I imagine whoever has been the selling the stock lately has a shorter term focus than I do.

The 0.6x investment manager is Senvest Capital, managed by Richard Mashaal of an entity his father Victor Mashaal started.

The company is essentially the Mashaal family office fund, with ~50% of the stock owned by pere et fils. Returns are down down 12% this year but they grown equity from $284M in 2011 to $821M in 2014, or 43% CAGR vs ~18% for the S&P. Equity at 3Q15 remains is around those 2014 levels.

I doubt they are going to continue to grow SE by 43% CAGR but they take big long term bets on parts of the small cap market that I don't have the bandwidth to analyze deeply and I want to get a sliver of exposure to it at a discount to book value.

I think about the both of these companies like "investments in the minds of ..." stocks. Other stocks of this type that I've looked at include Biglari Holdings at 1.4x book, ALJJ at 2.9x and Greenlight Re at 0.8x where funds have returned -20% YTD. (I like on the GLRE website it says the "investment accounts are managed by DME Advisors LP" as if we don't know the manager is David Einhorn. I wonder if it says his name in up years?).

It's possible that SEC even at 0.6x is a terrible investment. It's on the radar simply b/c it hit a bunch of home runs in a few good years and this isn't really the picture of steady consistency. Also, they've been reorganizing their structure and adding a presence in NYC, ie expanding which most certainly means more G&A and potentially means they are confusing luck with intelligence. But if it's successful there's a lot of sizzle on the steak and you're not paying a lot for that option.

All of these companies in my portfolio I'm comfortable owning for the long term, though FHCO will require some changes in their consumer strategy, their capital allocation strategy or simply a change in management to work. That is something I want to figure out how to address.

And then there is long list of stocks on my radar for deeper analysis, etc. It hopefully never ends. When I get my teeth into an idea, time disappears. I am grateful that I get to do what I love.

Beyond stocks, I'm trying to figure out the fundraising aspects of the firm (from smiles to teeth gnashing). It is a quandry for every new business, but especially in the investment management world.

The difficulty is explaining what differentiates me from everyone else who says they're patient long term investors, and that's essentially ... everyone else. And then as well how to package my product without hype and deliver a message with integrity that resonates beyond just "growing capital" and "a solid foundation of wealth" and other white bread bullshit. It needs to pull together a lot of je ne sais quoi themes that resonate with me and hopefully with clients, like the "where are the clients yachts" concept, the dangerous stupidity of the biz-fo-tainment industry, the impact and attitude of thinking like an owner and not just a shareholder, etc. I'll figure it out at some point.

The goal of the service is investing client funds in a portfolio of small cap stocks that will outperform the market with lower risk. It sounds so easy on paper but as I've transitioned from doing it as an amateur personal investor with a diversified portfolio of  hits and misses to a professional and concentrated portfolio with hopefully many more hits than misses, I can see that this endeavor - both the investing side, the marketing side and the business administration side - is one of the hardest things to do well and with enough consistency to prove that it's not blind luck. I hope to prove it over time.

I'll conclude by thanking all the you readers - including the robots (01110100 01101000 01100001 01101110 01101011 01111001 01101111 01110101) - for their your participation and hope this blog has added value to them you, as an investment tool, or as a way to consider new ideas in the world of small cap equities, or simply even to pass the time.

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