An Updated More Accurate Take on the Market Cap Distribution of the "Best 30-Stocks over the last 30-Years"

As I acknowledged, my initial analysis of the list of 30-stocks, was pretty weak and based on a methodology that skewed everything downwards.

So I went to the SIBL library and looked at actual market caps from 30-years ago.

Unfortunately, I could not get exactly 30-years ago - the Bloomberg terminals at SIBL are there by the largess of the Bloomberg Corporation (ie they're free) - but there's limited functionality; no Excel add-in, no help, no printing (all things I wish I'd known ahead of time).

Instead there was a lot of "XYZ Equity FA GO"-ing and then scribbling down the market cap as early back as I could get. The earliest back I could get was 1988, though for some companies it was even later. (The full data set that I used is at the bottom of this sheet).  And I still couldn't figure out the Market Cap of the S&P 500 in 1985.

But I took what I could get, adjusted it for inflation using CPI calculator and here are two bites at the summary data, all again supporting why small cap companies can be more interesting for patient investors.

First, a frequency distribution of the companies and their market caps @ 12/31/15 and ~30-years ago, adjusted for inflation ....

	# of companies			Market Caps in buckets
Market Cap	Today	30-yrs ago (inf adj)		like they looked 30-yrs ago	30-yrs ago (inf adj)
Under $300M	1	14		Under $50M	4
$300M-$1B	0	7		$50M-$200M	7
$1B-$10B	13	6		$200M-$500M	6
$10B-$100B	8	2		$500M-$1B	4
Over $100B	7	0		Over $1B	8

... this frequency distribution alone tells the story.

Almost half were under $300M in today's dollars. Some might argue that 30-years ago, a $300M mkt cap company wasn't small. Well, four of these companies were under $50M in today's dollars, and another seven were between $50M-$200M.

And then here's again some very basic statistical analysis, which shows how small these were relative to the overall market 30-years ago. All of them together made up just 2% of the (estimated size) of the S&P. If I take out Altria (~$48B market cap in today's money), that falls to under 1%. And incidentally, take AAPL out of today's figures and the sum of all the companies relative to the S&P falls to ~6% ...

		Calculated 30-Yrs ago	Actual from "awhile ago"	Inflation adjusted
Market Caps ($M) of 30 / 30 Stocks	Today
min	$86	$1	$5	$10
median	$14,916	$65	$194	$388
avg	$55,203	$191	$1,423	$2,802
max	$523,852	$1,662	$24,100	$48,272
sum	$1,600,881	$5,530	$41,261	$81,267
~ total market cap of S&P 500	$17,500,000	$2,000,000	$2,000,000	$4,000,000
sum as % of S&P 500 market cap	9.15%	0.28%	2.06%	2.03%
~S&P 500 price	$2,038	$212	$212	$424
max mkt cap as % of S&P mkt cap	2.99%	0.08%	1.21%	1.21%

... Obviously, small companies - b/c of the law of large numbers - can compound higher growth rates. And obviously, this whole list that Zweig put together suffers from survivorship bias. For each of these 30 companies there are thousands that no longer exist. I mean, just look at the top-10 companies in the S&P from 1985 for an example of survivorship.

Now I'm officially done with this little OCD moment. Though it's still not completely precise, it's good enough and better still, for the first time in long time, I've found a pretty interesting crop of small-cap companies I'd like to analyze! Will share what I can at a later date here.   

		30-yr		marketcap	Calculated	Actual from	Inflation
name	% return	CAGR	ticker	12/31/2015 ($M)	30-yrs ago	"awhile" ago	Adjusted	Date of M/C
Balchem Corporation	107,099	26.18	BCPC	$1,859.0	$1.7	$5.2	$10.5	FYE1988
Home Depot Inc	67,795	24.27	HD	$169,654.6	$249.9	$808.8	$1,620.0	FYE1988
Amgen, Inc.	62,850	23.96	AMGN	$121,978.8	$193.8	$2,437.0	$4,386.6	FYE1990
Nike Inc	42,111	22.32	NKE	$106,548.9	$252.4	$2,943.0	$5,297.4	FYE1990
UnitedHealth Group Inc	40,503	22.16	UNH	$113,227.3	$278.9	$71.9	$104.3	FYE1998
Danaher Corporation	39,526	22.06	DHR	$63,147.8	$159.4	$322.2	$467.2	FYE1998
Altair	39,070	22.01	NA	NA	NA	NA		NA
Kansas City Southern	37,384	21.83	KSU	$7,593.8	$20.3	$409.9	$821.0	FYE1988
Jack Henry & Associates, Inc.	36,716	21.76	JKHY	$6,451.1	$17.5	$12.2	$24.4	FYE1988
Apple Inc.	31,428	21.13	AAPL	$523,852.2	$1,661.5	$5,453.0	$10,922.4	FYE1988
Altria Group Inc	28,432	20.72	MO	$118,564.0	$415.5	$24,100.0	$48,272.3	FYE1988
Paychex, Inc.	26,838	20.49	PAYX	$17,451.8	$64.8	$193.5	$387.6	FYE1988
HollyFrontier Corp	26,249	20.4	HFC	$6,101.7	$23.2	$130.0	$260.4	FYE1988
Monster Beverage Corporation	25,323	20.26	MNST	$27,594.5	$108.5	$53.3	$77.3	FYE1998
Stryker Corporation	21,329	19.57	SYK	$37,188.0	$173.5	$316.2	$632.4	FYE1988
Expeditors International of Washington	20,127	19.34	EXPD	$8,263.7	$40.9	$87.4	$174.8	FYE1988
Gentex Corporation	19,095	19.13	GNTX	$3,999.7	$20.8	$30.2	$60.4	FYE1988
CVB Financial Corp.	16,232	18.49	CVBF	$1,566.0	$9.6	$61.6	$123.2	FYE1988
Helen of Troy Limited	16,057	18.45	HELE	$2,500.5	$15.5	$65.3	$124.8	FYE1989
St. Jude Medical, Inc.	15,951	18.42	STJ	$14,916.0	$92.9	$452.2	$904.4	FYE1988
Medtronic PLC	15,820	18.39	MDT	$107,585.0	$675.8	$1,100.0	$2,200.0	FYE1988
Raymond James Financial, Inc.	14,588	18.07	RJF	$5,997.9	$40.8	$88.1	$159.7	FYE1990
Applied Materials, Inc.	14,082	17.93	AMAT	$19,452.1	$137.2	$328.8	$657.6	FYE1988
Cracker Barrel Old Country Store, Inc.	13,912	17.88	CBRL	$3,176.1	$22.7	$112.9	$225.8	FYE1988
Graco Inc.	13,593	17.79	GGG	$3,861.4	$28.2	$133.0	$266.0	FYE1988
SEI Investments Company	13,256	17.69	SEIC	$6,182.2	$46.3	$205.0	$410.0	FYE1988
Precision Castparts Corp.	13,152	17.66	PCP	$32,326.4	$243.9	$563.6	$1,127.2	FYE1988
Lowe's Companies, Inc.	13,030	17.62	LOW	$65,768.6	$500.9	$755.8	$1,511.6	FYE1988
Watsco Inc	12,176	17.36	WSO	$3,985.9	$32.5	$15.5	$27.9	FYE1990
Dynamic Materials Corporation	11,943	17.28	BOOM	$86.0	$0.7	$5.8	$9.7	FYE1992

-- END -- 

THIS IS NOT A SOLICITATION FOR BUSINESS OR A RECOMMENDATION TO BUY OR SELL SECURITIES. IT IS MERELY THE RAMBLINGS OF AN OVER TIRED INVESTOR *SNIFF* WORKING ALONE IN HIS OFFICE *VIOLINS PLAYING SAD SONGS OUT OF TUNE * TRYING TO START A BUSINESS AND RAISE MONEY FROM OUTSIDE INVESTORS *A MIME JUST WALKED BY MY OFFICE AND GAVE ME THE FINGER* I CANNOT GUARANTEE THE ACCURACY OF THIS INFORMATION *THERE WASN'T REALLY A MIME IT WAS MY 8 YEAR OLD SON* DO YOUR OWN HOMEWORK.

Friday's WSJ article on the top 30-stocks over the last 30-years highlights why I focus on small cap companies (EVI)

On Friday, Jason Zweig of the WSJ, wrote a short post on the thirty best stocks over the last 30-years. The list had familiar and unfamiliar names, etc. but I was curious about the market values of the companies from 30-years ago vs today ...

	Market Capitalization
	Today	Calc 30-yrs ago
min	$86,307,178	$716,658
median	$14,907,501,057	$64,075,012
avg	$54,878,775,874	$191,013,641
max	$538,029,685,173	$1,706,513,845
sum	$1,591,484,500,360	$5,539,395,576
~ total market cap of S&P 500	$17,500,000,000,000	$2,000,000,000,000
as % of S&P 500 market cap	9.09%	0.28%
~S&P 500 price	$2,038	$212
max mkt cap as % of S&P mkt cap	3.07%	0.09%

... now this is a really bad back-of-the-envelope analysis. I simply backed out the 30-yr market caps using the current market cap and the total return figures. So any dividends paid would therefore be reflected as a reduction in market value, skewing all of these companies smaller (I know, I know ... but I wonder how far off I am?).

I also estimated the total market value of the S&P from 1985 based on the market value of the top-10 companies - $300B - and assumed it represented 15% of the total. If I had to guess, it was probably smaller.

Maybe I'll trek down to SIBL and use their Bloomberg terminal or perhaps someone with Factset or Bloomberg can post actual market values from 12/31/1985? All the data I used is pasted below.

What this imperfect data shows (and what the actual data might show) is that the companies with the highest total returns over the last 30-years were all pretty small companies 30-years ago.

Obviously, not all small companies grow 107,000% over 30-years as the first name on the list shows (I talked with a PM who has owned BCPC over the last 30-years and he said, "Obviously I did not know what it would return") but I am confident that the population of companies that will grow exponentially in the future will most likely come from the small cap universe today.

As a patient investor, I expect the companies I buy today I will hold for many many years. And in fact, one name I've written about on this blog is Envirostar (EVI), and it has a connection to Watsco, which is # 29 on this list.

The relatively new CEO of EVI - Henry Nahmad - is the nephew / son of the executives at Watsco who started rolling up companies in the fragmented HVAC distribution business in the 1970's. Henry is in the early stages of planning a similar endeavor in the fragmented commercial laundry equipment distribution space. One can only hope the apple does not fall far from the tree.

Here are some links I used for the data.
http://etfdb.com/history-of-the-s-and-p-500/#1985
http://marketcapitalizations.com/historical-data/total-market-cap-sp-500/

Here's the list from the WSJ in gsheets if anyone wants to look at it ...

		30-yr		marketcap	calc marketcap	actual marketcap
name	% return	CAGR	ticker	today	30-yrs ago	30-yrs ago ???
Balchem Corporation	107,099	26.18	BCPC	$1,780,657,337	$1,661,076
Home Depot Inc	67,795	24.27	HD	$160,083,194,883	$235,780,536
Amgen, Inc.	62,850	23.96	AMGN	$114,882,627,517	$182,498,217
Nike Inc	42,111	22.32	NKE	$105,393,852,389	$249,683,382
UnitedHealth Group Inc	40,503	22.16	UNH	$109,512,046,230	$269,714,174
Danaher Corporation	39,526	22.06	DHR	$59,282,842,285	$149,605,921
Altair	39,070	22.01	NA	NA	NA
Kansas City Southern	37,384	21.83	KSU	$7,784,655,487	$20,767,942
Jack Henry & Associates, Inc.	36,716	21.76	JKHY	$6,479,110,661	$17,598,627
Apple Inc.	31,428	21.13	AAPL	$537,945,105,324	$1,706,245,576
Altria Group Inc	28,432	20.72	MO	$119,269,087,150	$418,018,671
Paychex, Inc.	26,838	20.49	PAYX	$17,269,504,168	$64,108,338
HollyFrontier Corp	26,249	20.4	HFC	$6,383,434,190	$24,226,476
Monster Beverage Corporation	25,323	20.26	MNST	$27,373,551,700	$107,672,390
Stryker Corporation	21,329	19.57	SYK	$37,531,444,690	$175,143,239
Expeditors International of Washington	20,127	19.34	EXPD	$8,425,048,167	$41,652,485
Gentex Corporation	19,095	19.13	GNTX	$4,010,047,368	$20,891,104
CVB Financial Corp.	16,232	18.49	CVBF	$1,631,987,874	$9,992,578
Helen of Troy Limited	16,057	18.45	HELE	$2,530,920,774	$15,664,546
St. Jude Medical, Inc.	15,951	18.42	STJ	$14,896,194,389	$92,805,398
Medtronic PLC	15,820	18.39	MDT	$107,345,960,346	$674,283,671
Raymond James Financial, Inc.	14,588	18.07	RJF	$6,336,206,163	$43,138,659
Applied Materials, Inc.	14,082	17.93	AMAT	$20,096,658,964	$141,705,394
Cracker Barrel Old Country Store, Inc.	13,912	17.88	CBRL	$3,144,699,741	$22,442,904
Graco Inc.	13,593	17.79	GGG	$3,992,493,420	$29,157,186
SEI Investments Company	13,256	17.69	SEIC	$6,458,793,934	$48,358,745
Precision Castparts Corp.	13,152	17.66	PCP	$32,326,359,944	$243,935,707
Lowe's Companies, Inc.	13,030	17.62	LOW	$65,830,888,057	$501,377,670
Watsco Inc	12,176	17.36	WSO	$4,057,186,436	$33,049,743
Dynamic Materials Corporation	11,943	17.28	BOOM	$86,167,976	$715,503

- END -

THIS IS NOT A SOLICITATION FOR BUSINESS OR A RECOMMENDATION TO BUY OR SELL SECURITIES.

when the process works, the patient investor sits on losses (FTLF, VRX)

Two forms of regret I most often hear when talking with investors are:

I sold too early (b/c it went up)
I held too long (b/c it went down)

Surprisingly, I rarely hear anyone say: "I wish never bought that .... ". Buying the wrong stock is like having an STD; nobody wants to admit it but if you're active as an investor (or otherwise), it's probably going to happen.

For investors who rely on research as the foundation of their work, having a checklist or process can help avoid mistakes and, when they happen, provide for an easy and effective post-mortem if the mistake is the result of a deviation from process.

However, a flawed process, or worse, a mistake that precedes process - both of which can compound mistakes - must be exceedingly hard to detect. I imagine that navigating the solution to a flawed process requires an intense degree of self-reflection and might potentially be crushing.

I'm thinking broadly of something like Valeant, where very smart investors were proven to be very wrong. I don't know Ackman or Cuniff's processes and what - if anything - went wrong with them, but as an outside observer, I think their mistake was accepting the prime fallacy that a pharma can sustain itself without R&D. In my opinion, once they accepted that, they were screwed no matter the proximate cause for the company's revaluation.

This post relates to my continuing fears of an error in process tied to a stock that - like many on the market - is underwater for the year.

Specifically this post is about Fitlife Brands (FTLF), which sells sports nutritional supplements, primarily to GNC franchise stores but also increasingly to GNC corporate stores and independent channels.

I've written about it previously and I own and like the company. The stock, like many that trade on public exchanges, is down and though we all should conduct constant due diligence on our holdings, one's focus can really narrow when sitting on steep losses.

It is the nature of capital that we should have an urge to not lose it, but if we trust our processes, it's important to fight that urge, dig down and do more research.

Keep asking that question: "What don't I know?" and then try to learn something new, because selling a stock when it's down for no other reason is sheer idiocy: If I liked it at 1x, I want more of it at 0.6x.

So the losses I'm sitting on with FTLF got me out the door for more channel checks and more due diligence and for better or worse, most of what I heard reinforced what I already knew: store mangers love the brand and it continues to sell well.

I visited five stores that were owned by various franchisees that among them own more than 20 stores, and the majority of managers I talked with all said the same things: The company is great at selling, they are great at coming up with new brands and new ideas, and their sales people are smart, personable and know the product.

Trends were mixed - some said volumes were down for the quarter other that they were up - but they all said the company was awesome and the long term trend / outlook was from their perspective positive.

I talked to two store managers who had each been in the industry for +10 years and they said the "industry" clouds felt no different than prior cycles. One said volumes were impacted by "the Dr. Oz thing" and seasonality but nothing dramatic.

Another store manager said he'd been carrying the product since they were "nothing" and that he'd seen them grow "like this" (45 degree angle with his arm) and he still sees that growth ahead.

A manager repeated something I'd heard elsewhere, that FTLF reminded him Cellucor when it was just starting out. (Cellucor is owned by Nutrabolt which rec'd a minority investment from MidOcean Partners in July 2014).

One new - marginally negative - thing I learned is that the most successful franchise in the area didn't even carry the product. 

That franchise, in a mall with predominantly Chinese stores, doesn't carry a lot of sports supplements in general and my sense was they don't have to; Chinese are big buyers of supplements. 

I didn't see that as a huge issue and it certainly made sense to me. As a side note, I had been previously informed - with some sense of awe by another store manager - that this Chinese store did $7M in annual sales, an astronomical figure compared to the $2M-$4M / year that would be expected from other stores of similar sizes. Just some color on what a GNC franchise brings in the door. 

But the short summary is the channel checks reinforced most of what I already knew. 

So I've revisited my model as well. 

iSatori (IFIT) at the time it was acquired by FTLF was more distressed than anticipated b/c of poor balance sheet management by the prior exec team (reinforcing the opportunities to be managed by FTLF's excellent management team) leading to a lower share ratio in the acquisition.

By my math, FTLF issued 1.8M shares to acquire IFIT then repurchased 600k shares (I'm guessing at $1.50 / share) back from Stephen Adele, IFIT's prior CEO. 

So I estimate post deal FTLF has 10M shares outstanding and a slight net cash position. I maintain they can continue to do $30M sales / $3M EBITDA year one as a combined company. At current prices its trading at 4x EBITDA, which I think is an incredibly attractive price for something that has no impact from China, commodities, energy, f/x, etc.

On top of the overall market turbulence, FTLF has one specific headwind also previously disclosed and also related to the deal: IFIT's largest shareholder Russell Cleveland has about 460k shares he wants to sell and the company has the right of first refusal on the price.

This could lead to some turbulence in the near term, b/c I would bet the seller wants to get the most money he can and the buyer wants to pay the lowest reasonable price and I can imagine the seller using some leverage ala "I will dump every share on the market at $0.90 before I sell you my shares below $1.40" and them telling him to go ahead (for some reason I imagine this dialogue taking place with french accents).

This is a temporary non-operating issue overhanging the stock that should be resolved in short order, is not a surprise and maybe it's an opportunity to lower my cost basis.

Big picture is the CFO and CEO have a history of running this business profitably and with cash flow generation - even when growth has slowed in the past - I see no reason my thesis should change. In short, the stewards whom I entrusted my capital with continue to run the business with the same strategic aplomb as they've done before and as I expected.

Yet, with Valeant in periphery, I can't help but wondering if - even as I check every check in my process - have I accepted a prime fallacy that obviates the process?

I have two thoughts on what that might be ...

1) The supplement industry has intrinsic value.

I accepted the hypothesis that this is a large mature industry with ~$3B in sales that isn't going away overnight. There's room for innovation such that new brands are accepted and in some ways, it isn't much different from other consumer products (ie pop soda, for example) that aren't really good for you but are consumed in mass.

2) The company's push model advantage is sustainable.

Most of FTLF sales go through GNC franchises. GNC makes it's money selling wholesale to franchises and is expanding its franchise system so on its face, this points to more doors for FTLF. But  it makes FTLF that much more reliant on the GNC channel.

I had initially thought to hedge FTLF with a short against GNC in order to offset the risk of this situation - in retrospect it would have been the right call - but it seemed absurd to hedge a microcap with a short against a midcap. Maybe next time it won't be so absurd.

More broadly, internet sales of sports nutritional supplements is the elephant in the room. FTLF's model is to save on sales / promotional spend and push at the store level. But that won't work where the internet disintermediates the push channel. And that means it might need to spend on S&M, which would impact profitability / cash flow / etc.

... These are the questions that make investing hard and their answers, or how I choose to answer, will help me succeed or fail quickly in my business and more broadly help define my process.

Even as I sit on losses, I have to rely on my process or the emotional toll of price signals will be overwhelming. I want to avoid that.

I think my process is working. I still think is a very well run business - run for profitability and cash flow - with future opportunities for growth and margin expansion, going though some very specific turbulence regarding post acquisition shares (a temporary issue), some industry overhang (as it has done before) as well as some systemic issues that rains on all stocks.

Relying on a process doesn't make sitting on losses any more fun but it makes it bearable and its something a patient investor needs to accept, even perhaps as an opportunity to lower their cost basis.

-- END --

THIS IS NOT A SOLICITATION FOR BUSINESS OR A RECOMMENDATION TO BUY OR SELL SECURITIES. I WRITE THIS PART IN ALL CAPS TO STRESS THAT INVESTORS SHOULD DO THEIR OWN HOMEWORK WHEN ANALYZING STOCKS.

recent advice to a young investor; "klarman and burry don't give a shit about you"

I received an email from a young investor telling me he'd closed out of a common position we both held and had briefly shared research on over the last year.

He wrote to me, on why he sold: "I may be making a mistake down the road, but I could not get over the some of the risks surrounding broker/dealer requirements to keep the stock listed. This was a large position in my account, so the risks seemed magnified."

I am not one to judge. people sell for all kinds of reasons. he seemed like a nice kid who'd done some digging and we shared an interest in offbeat names. And I think he sent the email from a good place; he was sharing, and that's nice.

but i didn't know what to do with the information, and so i was bothered by the email. I still can't put my finger on it. i ended up quibbling with my wife, who'd texted me like 30 seconds later about dinner (that was assuredly not the right response).

a lot has changed with the company in the last year - it de-registered in April and hired a new, young (but experienced) CEO at year end - but nothing that initiates action now.

maybe if it were a reason i'd understood, it would have given me an opportunity to learn, think, review, or discover a new angle on the investment prism. instead, it felt like an affront. I don't know why? i know it wasn't intended that way. i think I didn't know what to do with the information.

i should have just deleted it, but i hastily penned him the response below. he politely and gracefully acknowledged it when he could've told me something else ... but when i reread it, i think it's pretty good advice for kids starting out as investors wall street, so i decided to post it here:

"A-

I appreciate that you told me you sold, though it was unnecessary and it has no impact on me.

But I'm writing here very much in reaction to something that's bugging me ...

you write on your SZ profile that you're fans of Mike Burry and Seth Klarman
And that you're a deep value investor
And that you read margin of safety

... And all I got to say is: "talk is cheap."

You've sold a stock you've held for maybe a year for a reason that makes absolutely no sense and based on this information - all the info I've got - you're not only failing on the long term deep value front but you're also not honestly reflecting on what you're doing and why. your reason for selling makes no sense to me.

lookit, I know nothing about you. maybe this is way off base. maybe i'm just a voice in the mist, but you might want to seriously take a long hard look at this experience, figure out for yourself with honest self critique what went wrong, what you can learn from it and how it might effect you going forward.

there's a lot of things we can do with our lives time beyond investing. whatever it is, if it comes from deep inside, from a place of passion and obsession and love, then you're in the right place. and I urge you b/c you're young, take your time and figure out what that is, and do not stop until you get there. it's worth the effort.

seth klarman and mike burry don't give a shit about you. Plus I bet there have been many days when they wish they were someone else. If you're putting them on a pedestal b/c they're rich and successful, then you're doing it for the wrong reason. [And] if they're your heroes b/c they did extra work to make sure they were right and stuck to their guns when everyone else said they were wrong, then you've just failed your test.

that's my best effort to be like "good luck, kid"

/ Avi"

... and I meant that, the good luck part, figuring it out and all that.

it takes a lot of practice learning to do anything and investing is no different. but learning means making mistakes. so beginners should start small and take time figuring out their tolerance for pain and risk and then use that as a guide to the questions they need to keep asking.

the way i see it, the more you know, the better you can establish an appropriate price for a stock, understand why it doesn't trade at your price and figure out what it will take to get there:

who are the customers?
why do they pay for it?
what would make them change their behavior?
how does the company make money on this?
etc

and then with more practice and observations, you might start to see patterns emerge where your research leads you places you didn't know, b/c you kept an open mind, and you asked more questions and dug for more research.

or it takes you to a place where you find other people investing in the same things and you are suddenly a victim of confirmation bias: "oh they're doing it, so i feel better." sometimes it's better to seek out people who disagree with you.

finally, there are so many angles to investing. but having a good post mortem is a great tool. keep a collection of your investment decisions (this is mine, here) and then reflect later on what went right and what went wrong. it can be very helpful in scaling the learning curve.

improvement is not automatic and no one is an expert in everything but if you love this, and carve out a place for yourself, and can maintain the intellectual honesty to reflect back on what's going right and wrong, then it just gets back to the theme that underlies this blog: patience.

it's tough - as someone just told me - when you commit capital to an idea that does nothing. capital is the air we breathe and our great passion requires a lot of it. start small, be patient, don't go bust and if investing it lights a fire for you, you'll find endless opportunities to learn.

- END -

THIS IS NOT A SOLICITATION FOR SERVICES OR ADVICE ON BUYING OR SELLING STOCKS. I DON'T KNOW KLARMAN OR BURRY OR THEIR FEELINGS ABOUT YOU. THEY MIGHT ACTUALLY GIVE A SHIT!

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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THIS IS NOT A SOLICITATION FOR BUSINESS OR A RECOMMENDATION TO BUY OR SELL SECURITIES. DO YOUR OWN WORK BEFORE INVESTING IN EQUITIES.

ARIS' annual report: Guides to 20% topline + margin expansion towards high teens

Last week, ARIS released its annual report. The shareholder letter highlighted very briefly (one page) the company's evolution from a two product / four vertical company with 70% of its revenues in the no growth / high cash flow e-catalogue business to a company with five products addressing lead generation and business management software, et al. and serving eight different verticals.

The letter also included a bit of forward looking guidance:

"As we look forward to FY16, we expect our current organic growth rate and the impact of the acquisitions we completed in FY15 to generate $47M to $49M in revenues. We also expect to see continued improvement in adjusted EBITDA and cash flows. We are on pace to achieve a $50M annualized revenue run rate in the back half of FY16 and a $10M adjusted EBITDA run rate shortly
thereafter."

IF they're right - and I always take guidance with a grain of salt b/c who knows the future? - it would imply 20% topline growth AND expanding EBITDA margins all within the structure of the company as it looks today.

If that means no more equity dilution, than conceivably EPS would grow faster than revenues and this would be the third straight year of substantial EPS growth.

I've been thinking a lot about EPS growth since meeting a PM friend of mine who uses sustainable EPS growth as one of the five metrics in his investment framework.

It resonated with me b/c I've never really weighted EPS that heavily, preferring instead to focus on cash flow or margins, but it's a great little metric that captures in one line and over time: operations, tax, capital management, acquisition strategy (b/c there's no GAAP EPS growth with goodwill writedowns) and or course equity dilution.

I've written in the past about the destructive nature of ARIS'  share dilution but based on where the company is today, I think we are past the point of using expensive shares for acquisitions and moving towards inexpensive debt. (I say "expensive shares" b/c although the valuation of the shares were cheap when the deals were consummated, if the stock does what I anticipate it will, these purchases will seem very expensive in hindsight).

With a strong balance sheet, recurring revenues and solid cash flow, debt becomes a more palatable option for future growth, though even better would be organic growth. There is for example, the opportunity to grow their subscriber base with the new platform of projects as well as a high churn rate ~15% that should be converted into organic growth.

This will be the year where the company proves whether these acquisitions truly created a portfolio of services and solutions that resonates with customers. If it does, as my research indicates, then the stock remains very inexpensive.

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THIS IS NOT A SOLICITATION FOR BUSINESS OR A RECOMMENDATION TO BUY SHARES. DO YOUR OWN HOMEWORK. I MAY OWN THIS OR ANY OTHER COMPANY I WRITE ABOUT.