Micro Caps and Buffett's >50% returns

[Tim Eriksen]

Munger's doing nearly 40% returns (~37-38% CAGRs) with small sums (>$50 million of cost basis) at the Daily Journal since changing the investment strategy in early 2009.  And he's not buying small caps ("Fortune 100 companies", etc).

 

Imagine if he wasn't a billionaire and was a little hungrier....

 

wabuffo

 

Maybe I am missing something here, but I don't recall Munger changing the investment strategy at DJCO.  It was my understanding that he finally put cash to use.  Big difference.  Being in cash was a conscious decision and those years should be included in the CAGR.  He is not doing 40% a year.  He stayed in cash and then in 2009 wisely acted near the bottom and did over 160%.  Giving complete benefit of the doubt that all cash and t-bills were for the business, he then was roughly -8% in 2010, up 13% in 2011 and 17% in 2012. 

 

I am not saying he cannot generate excellent returns but I don't think you can exclude what appear to me as "thumb sucking" years.   

[BG2008]

Anyone here have confidence that they can do 50% a year?  Or Even 30+%?  More importantly, what strategies will you use? 

[boilermaker75]

Anyone here have confidence that they can do 50% a year?  Or Even 30+%?  More importantly, what strategies will you use?

 

No, but maybe 15% per year.

[boilermaker75]

Anyone here have confidence that they can do 50% a year?  Or Even 30+%?  More importantly, what strategies will you use?

 

No, but maybe 15% per year, which I think is good since I have a full time job.

[ericd1]

I have confidence I can't do it!  But I did +50% once...+58.6% 2009 and -42.3% in 2000.  All the rest of the years since the 1970s have been inbetween and pretty lumpy.  :).

 

If this board had been around longer than it has...and if I found it and learned from the great contributors I would have definately improved upon my 12% long-term average.

 

Buffet wouldnt have a problem today.  His years of experience would help plus he just 'gets it' better than 99.9% of investors.

[rukawa]

I have a few questions about what microcaps... not sure if anyone know the answers.

 

My question is how do you get information on them. Mergent Online is once source. What else? How exactly do you research really small market cap stocks?

 

The other question is liquidity. How do you buy and sell these things?

[oddballstocks]

I have a few questions about what microcaps... not sure if anyone know the answers.

 

My question is how do you get information on them. Mergent Online is once source. What else? How exactly do you research really small market cap stocks?

 

The other question is liquidity. How do you buy and sell these things?

 

Man you're really going to pull me out of the cave for this one… Here's the simple answer, research them no differently than you would any other stock.  Everything seems daunting if you don't have familiarity with it.

 

The first time I looked at a Portuguese stock it felt strange, same with France, same with Canada.  But now they're familiar, same with micro-caps.

 

Some file with the SEC, so you could read their filings on EDGAR.  Some file with OTC markets so you can read their filings on there.  Some are "dark", if you buy a share and call the CFO you might get a copy of the annual report.  I talked to a CFO last week, seemed like the nicest guy promised to send an annual report right away, guess what, nothing, blowing smoke, happens a LOT, deal with it.  So you call sometimes verify ownership and then they email or mail you an annual report, make a decision from there.  I've been greedy and asked for multiple years, if the person I speak to is nice, and it's towards the end of the week they usually oblige, some states (hint Southern) have better luck.

 

Some really dark companies won't give out anything, here's the tip, this is very good or very bad.  Usually bad, management robbing from shareholders etc.  Or extremely good and they don't want shareholder to know how good it is, I've seen both.  If you pester you can usually get an annual report, sometimes with an NDA.  The NDA thing frustrates me, legally shareholders have so many rights that they just ignore.  You can sue a company to examine records (except if the company is a Nevada company, Nevada sucks…I digress) and literally look at anything you want.  You can go on company grounds and examine the premise, the company might call the cops, but it's impossible to trespass on something you own.  With computers we're so detached, just looking at these statements online.  We own pieces of companies, real living breathing companies with people working for us, don't lose sight of that.

 

There's a site where some of this information is available for a fee, a modern Walkers Manual, I won't mention because I'm affiliated.  You can buy the Walkers when they become available, but I think I pee-ed in that pool, I mentioned Walkers on my blog and the used price went from $1.27 a copy to $50 and $100, it's not worth that much, I have three copies here, I'd pay $5-10 max.  Maybe it's a micro-cap investor sin but I've considered offering my Walkers books out on Amazon for $100, I purchased all of them for $1 or less, if I ran that racket it'd probably be the three best returns I'd ever have, 100 baggers...

 

You can be creative, this is where these companies are fun.  Start digging into local records, talk to people, do exotic internet searches for anything related to the company.  I've been able to triangulate sales and income for places that won't talk.  Some companies like insurance companies have to publish to the NAIC, banks publish to the FDIC.  The craziest was a dark company selling for .1x sales that had a Belgian subsidiary.  Through the help of a board member I came to find that all companies in Belgium have to file reports public or private, so I hacked my way through a Dutch site and found this company's local sub filing then translated it.  This company wouldn't give out anything, it's because the company sucked, not worth the time.

 

For tiny stocks you really need to enjoy the process, I know I do.  There's an aspect that's fun finding this strange stuff about little companies.  I like the local nature too, I drive past hundreds of local companies and think that some of the stuff I own is like that, with real people working hard each day where I benefit.  Not some giant bland office park in the exurbs with half the people surfing Facebook all day where when employees show up and work book value is destroyed (my experience working at a mid-cap a few years back, pathetic, and I've worked for a few more since, the story is always the same).

 

I've worked at startups, small companies, medium and large cap companies, and hands down the people at the startups and small caps work the hardest and care the most.  At bigger companies up to 40% of the workforce could be fired and business would continue as usual.  My working experience has shaped my investing experience, I'd rather invest in a small hungry organization where jobs are on the line rather than one where half the people don't matter and are just sucking up a paycheck until retirement.

 

Here's the bottom line, I love microcap stocks and tiny stocks, but for the time I'd suggest learning enough French and investing in French small caps.  They're more liquid, they trade on an exchange, and they publish regulatory filings (in French).  If you just limited your portfolio to those French stocks you'd do well, and it's easier to learn French than dig for information on some of these tiny companies.  There's a bunch of other areas that have easier returns for now as well, but a magician doesn't tell all their secrets.

[Tim Eriksen]

I have a few questions about what microcaps... not sure if anyone know the answers.

 

My question is how do you get information on them. Mergent Online is once source. What else? How exactly do you research really small market cap stocks?

 

The other question is liquidity. How do you buy and sell these things?

 

That is the challenge.  It is not economically viable for anyone to do serious publishing or analysis on micro caps unless they go with a very high cost / very few client model.  For the individual or small fund it requires a lot of hours.  Lots of screening.  Building a network of friends who pass on ideas.  Reading. Reading and more reading.  Going through massive lists of stocks from A to Z both listed and unlisted.  You probably have to look at foreign stocks too. 

 

The key to making big gains is understanding the information better than others.  For example, late last year Hennessy Advisors (HNNA) an unlisted asset manager purchased FBR's family of funds.  It was an all debt transaction and quadrupled the size of Hennessy.  You would have had to find out about the news and then understand the implication that earnings for Hennessy would also quadruple.  In this case there was a number of months where a small investor or fund could build a $200,000 position and watch it rise 2 to 3x.  If opportunities like that were common place investing would be easy, but they aren't and it isn't.

 

My approach has been to look for good micro and small caps at 6x earnings or less and sell them at 10x earnings.  If that PE expansion can happen within two years I will generate exceptional numbers, if it takes longer, results are more pedestrian, but still very good in terms of overall risk.  My two cents.     

         

[netnet]

Happy coincidence I was just going through some old reading material and this was buried:

http://www.fool.co.uk/news/investing/2011/10/20/6-ways-to-invest-like-a-young-warren-buffett.aspx

 

An article from UK Motley Fool re: investing like a young Buffett.

 

Two take aways,

• Although he was patient, he did want a catalyst.
  
• This Buffett quote was interesting, assuming he said it: "The best decade was the 50s; I was earning 50%-plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps be even easier to make that much money in today's environment because information is easier to access." emphasis added.
  

 

[Palantir]

There's a bunch of other areas that have easier returns for now as well, but a magician doesn't tell all their secrets.

 

Spoken like a bawss. +1

[rukawa]

Thanks Oddballstocks for the detailed answer! Its exactly what I was look for.

 

Thanks to Tim too!

 

If anyone has any other tips for microcaps, I'd love to hear them.

[wknecht]

Thanks Oddballstocks for the detailed answer! Its exactly what I was look for.

 

Thanks to Tim too!

 

If anyone has any other tips for microcaps, I'd love to hear them.

 

The Uniform Bank Performance Reports are very useful if you're one to look at banks (https://cdr.ffiec.gov/public/ManageFacsimiles.aspx). The FFIEC site has a user guide to help understand the accounting assumptions, peer groups, acronyms etc.

 

[hyten1]

rukawa another good place to look at all the banks is bankprobe.com

[shamelesscloner]

Let's fire up this thread again! What would Buffett be buying today if he were starting out in 2021?

 

SPACs near NAV? I'm sure he'd be cashing in on his own SPAC.

[mattee2264]

 

Haha this year people have been making way more than 50% returns in penny stocks. But I kinda feel that wasn't what Buffett had in mind.

[DooDiligence]

Ballantyne Strong

 

$45M Mkt Cap

$30M Cash

$25M Public Equity Investments

$13M Preferred Equity Investment

and an operating movie screens biz that earned $8M in EBITDA in 2019

 

It would be amazing if a Buffett/Munger type took over and invested the equity cash.

 

Idea courtesy of @jj_shipley

[shamelesscloner]

Ballantyne Strong

 

$45M Mkt Cap

$30M Cash

$25M Public Equity Investments

$13M Preferred Equity Investment

and an operating movie screens biz that earned $8M in EBITDA in 2019

 

It would be amazing if a Buffett/Munger type took over and invested the equity cash.

 

Idea courtesy of @jj_shipley

 

I see net debt of $9.4m. What am I missing?

[DooDiligence]

Ballantyne Strong

 

$45M Mkt Cap

$30M Cash

$25M Public Equity Investments

$13M Preferred Equity Investment

and an operating movie screens biz that earned $8M in EBITDA in 2019

 

It would be amazing if a Buffett/Munger type took over and invested the equity cash.

 

Idea courtesy of @jj_shipley

 

I see net debt of $9.4m. What am I missing?

 

Now I'm the shameless cloner.

[ValueArb]

Just reading this thread today, and feel like it's too negative. The market is inefficient in general, and less efficient the smaller the market cap. Not a lot of meat on the bone for a professional analyst running tens of millions of dollars in a five million dollar market cap stock that trades only tens of thousands of dollars a day.

 

My experience was from 2002 through 2007, when I quit my job to invest full time, starting with a $400k portfolio and needed to spin off a six figure income to live on. Focusing on the pink sheets and microcaps I still ran it up over $1M before the market crash. Not quite a 50% return, but then again I'm not that smart.

 

The nice thing about the lower regions of the market is there are often little arbitrage-like opportunities where you can make a few thousand in a transaction with a high certainty of success, those "workouts" help smooth out swings from your bigger positions and keep the graph moving up and to the right. The hard part is you can search for weeks, sometimes months, to find the next one.

[shamelesscloner]

Ballantyne Strong

 

$45M Mkt Cap

$30M Cash

$25M Public Equity Investments

$13M Preferred Equity Investment

and an operating movie screens biz that earned $8M in EBITDA in 2019

 

It would be amazing if a Buffett/Munger type took over and invested the equity cash.

 

Idea courtesy of @jj_shipley

 

I see net debt of $9.4m. What am I missing?

 

Now I'm the shameless cloner.

 

Your DD smells like DooDoo

[DooDiligence]

Ballantyne Strong

 

$45M Mkt Cap

$30M Cash

$25M Public Equity Investments

$13M Preferred Equity Investment

and an operating movie screens biz that earned $8M in EBITDA in 2019

 

It would be amazing if a Buffett/Munger type took over and invested the equity cash.

 

Idea courtesy of @jj_shipley

 

I see net debt of $9.4m. What am I missing?

 

Now I'm the shameless cloner.

 

Your DD smells like DooDoo

 

You're the 1st person to correctly uncover the real meaning of my username.

[spartansaver]

Ballantyne Strong

 

$45M Mkt Cap

$30M Cash

$25M Public Equity Investments

$13M Preferred Equity Investment

and an operating movie screens biz that earned $8M in EBITDA in 2019

 

It would be amazing if a Buffett/Munger type took over and invested the equity cash.

 

Idea courtesy of @jj_shipley

 

I see net debt of $9.4m. What am I missing?

 

Now I'm the shameless cloner.

 

Your DD smells like DooDoo

 

You're the 1st person to correctly uncover the real meaning of my username.

 

On Feb. 4th, company sold some electronic billboard making division for $23M. Last balance sheet cash amount was $7M. Debt is around 3.7M as of most recent report (I ignore leases). Movie screen business is now losing money. There is plenty of corp. SG&A that the company breaks out separately. I doubt movie screen business can just get rid of corp. SG&A, someone needs to do the accounting and whatnot. Doesn't seem that interesting and for some reason they are issuing equity (doesn't make much sense if they think it is undervalued with a whole pile of cash). Maybe I'm missing something.

[DooDiligence]

No position & no intention of one.

 

Popped up in my Twitter feed about the same time this thread got bumped.

 

Here's the full discussion from the originator of the idea:

 

[samwise]

Want a 51% CAGR since the start of this thread?

This is the way :)

http://www.nonamestocks.com/p/portfolio-performance.html

 

But

1. Only the poor man shall pass. I doubt you can put a million in this portfolio, and you certainly cannot sell your whole position on 2 hour spikes in the price.

2. You need the force with you, i.e. lots of luck, since the performance comes from a few stocks. Miss those and your returns may not be so good. Also if you sell them too early.

[ValueArb]

Heres an example of the most micro of micro-caps, and most butt of cigar-butts.

 

Infinite Graphics - INFG, hasn't filed financials since 2003. Last traded at $600 in September and October. Looking at their web site I can't tell if they are still in business or not, may have sold/licensed off all their products a year or two ago.

 

The interesting part? It paid a $400 dividend on January 4.