— Warren Buffett (1995)

Dear Grahamian Value Reader,

Greetings from Southern Florida and Southern California, respectively. We’re reaching out to share with you a (much overdue) Grahamian Value update —

During the 245 day pause since our prior communication, we’ve each transitioned to full-time private investors. Relatedly, we have pivoted from producers of public-facing investment research to consumers of exceptional online content.

As we sunset from (publicly) sharing our own perspectives, we’re proud to spotlight the five persons below — each spearheading a value-oriented online resource that we regularly read and absolutely love:

• Dan Schum | NoNameStocks

• David Flood | Elementary Value

• Jan Švenda | Svenda’s Manual

• Marcus Frampton | The Micro Cap and OTC Stock Letter

• Nate Tobik | Oddball Stocks

Passing the Grahamian Value Baton —

In our journey as co-editors of Grahamian Value, we’ve come to especially admire the subscription-based work of Nate Tobik and we’re proud to endorse his paid offering to our readers; if you’ve enjoyed Grahamian Value, you’ll likely similarly appreciate Nate’s Oddball Stocks Newsletter.

As paying customers, our incentive is that spreading the word will only lead to an even greater user-experience through continued internal re-investment into an already excellent premium offering.

We’re receiving no commission or revenue share from the Oddball Stocks Newsletter team in this direct endorsement. Our praise is solely merit-based and we’re delighted to “pay it forward” by supporting a great product — and great people.

Oddball Stocks Newsletter, discover investments in the hidden corners of the market —

In the spirit of the holiday season —

• Send over an email to editor@oddballnewsletter.com: mention that you’re a GV reader and you’ll receive a complimentary Oddball Stocks newsletter issue.

We remain fascinated by opportunities in small and obscure public equities. Within this niche, two additional premium resources that we particularly enjoy are Svenda’s Manual and GeoInvesting —

• Send over an email to svenda.jan@gmail.com: mention that you’re a GV reader and you’ll receive a sampling of Svenda’s Manual research notes.

• Send over an email to support@geoinvesting.com: mention that you’re a GV reader and you’ll receive a complimentary GeoInvesting platform trial.

And lastly —

If you enjoyed the peer-to-peer knowledge exchange of the Grahamian Value Fireside Conversation series, you’ll love the private membership community at MOI Global. John Mihaljevic (upon direct inquiry to john@moiglobal.com) will gladly share further MOI Global membership information with GV readers.

We wish you and your loved ones a wonderful holiday season.

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“Begin at the beginning”, the King said gravely, “and go on till you come to the end: then stop.”

— Lewis Carroll, Alice in Wonderland

PART ONE.

WEEK IN REVIEW

PART TWO.

WE’RE TAKING A PAUSE

In the past week —

• There have been no changes to our Grahamian Value Classic list.

I. WEEK IN REVIEW

This marks our twenty-eighth consecutive week with no new additions to the Grahamian Value Classic list of companies.

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II. WE’RE TAKING A PAUSE —

Two hundred eighty-seven days into this journey, we’ve hit our stride.

We’ve crafted thirty-two weekly digests, explored eighteen points of interest along the way, and showcased nine insights from respected thought leaders, in written and audio formats. Our audience base is compounding on a daily basis. 

There is no better time than now for us to focus on the next phase of Grahamian Value, in which we strive to provide (meaningfully) greater value for a more concentrated circle of people.

Pursuant to this broader ambition, we are announcing a strategic pause of this weekly digest — with renewed activity in late 2021.

In the alphabetical list below, we summarize the twelve Grahamian Value Classic names covered in this first phase of the Grahamian Value project —

• Dawson Geophysical Co. (September 18, 2020)

• Friedman Industries Inc. (December 11, 2020)

• Gulf Island Fabrication, Inc. (October 23, 2020)

• Hudson Global Inc. (October 9, 2020)

• Mammoth Energy Services Inc. (September 18, 2020)

• NCS Multistage Holdings Inc. (November 6, 2020)

• Newpark Resources Inc. (October 9, 2020)

• NOW Inc. (October 2, 2020)

• P&F Industries, Inc. (November 13, 2020)

• Rubicon Technology, Inc. (September 18, 2020)

• Servotronics, Inc. (September 25, 2020)

• Universal Stainless & Alloy Products Inc. (October 23, 2020)

We’re excited by the road ahead and look forward (in late 2021) to sharing with you the full details of our next phase. Thank you for joining us in this first phase of Grahamian Value.

We continue to cherish your time, your trust and your readership — and we look forward to our eventual return.

Wishing you and your loved ones a springtime (and upcoming summer) with a healthy mix of productivity and adventure.

EXCERPT FROM OUR 2020 ANNUAL LETTER:

Before further delving into details, let’s “start with why” —

• Individual Exercise. In launching Grahamian Value, we set out to compound our situational awareness and operating efficiency by a few basis points every 24 hours with deliberate practice, sustained over a (very) prolonged window. Within this framework, this weekly electronic digest and our flagship website are natural by-products of our root objective.

• A Shared Vision. Three categories of friendship exist. First, is a “friend for a purpose” — a utilitarian association dependent on reciprocal usefulness; when the usefulness disappears, the bond dissolves. Second, is a “friend for worrying” — a peer with whom to share sorrows, troubles and joys; joys when shared are multiplied while sorrows and troubles when shared are divided. Third, is a “friend for an ideal” — a shared dedication to common goals, with a readiness to sacrifice to attain these shared ideals. Within this prism, Grahamian Value is a collaboration that (deliberately) bonds the co-editors in a friendship of shared ideals for which the journey is the destination.

• A Global Think Tank. We embarked on this adventure with a viewpoint that the more we give, the more we’d get. This has proven true, in spades; the inbound (private) feedback we regularly receive is priceless, both literally and figuratively.

ABOUT GRAHAMIAN VALUE

Founded in 2020, Grahamian Value is a open resource dedicated to the art of intelligent investing.

The co-editors of Grahamian Value, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.

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“The safest and most profitable thing is to buy something when no one likes it. Given time, its popularity, and thus its price, can only go one way: up.”

— Howard Marks (January 24, 1994)

PART ONE.

WEEK IN REVIEW

PART TWO.

“THE ROAD AHEAD FOR NATURAL RESOURCES” (SELECT EXCERPTS)

PART THREE.

WEEKEND WATCHING

PART FOUR.

WEEKEND LISTENING

In the past week —

• There have been no changes to our Grahamian Value Classic list.

BRIEF OVERVIEW —

• We are intrigued (and impressed) by professional perspectives on the commodities investment landscape shared by Robert Mullin of Marathon Resource Advisors in San Francisco. With full permission, we showcase key excerpts and infographics from his writings.

I. WEEK IN REVIEW

This marks our twenty-seventh consecutive week with no new additions to the Grahamian Value Classic list of companies.

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II. SELECT EXCERPTS FROM “THE ROAD AHEAD FOR NATURAL RESOURCES”

“The challenge for capital allocators is that, unlike the physical world, the financial setting is constantly evolving. Usually, this manifests itself in gradual changes over years or even decades, resulting in prolonged periods of relatively consistent investment themes. Periodically, its shifts can be significantly more abrupt, and major turning points are typically marked by extended periods of elevated volatility coupled with a change in market leadership.”

— Robert Mullin, January 2021 (San Francisco, California)

With editorial emphasis added (bold) —

Capital expenditures for public natural resource companies, in spite of the most accommodative broader capital markets in history, have fallen by over 60% since peaking in 2012 to levels not seen since the early 2000s. It is worth noting that over that time frame broad commodity consumption has risen 35%. It is our belief that this growing base of demand is being severely underfunded.

The combination of natural decline rates as well as marginal capacity closures could well mean that the levels of demand needed to do so are below those that prevailed pre-Covid. Should that be the case, we would note that the most durable and powerful commodity bull markets are those built, not on rapidly rising demand, but on structurally constrained supply. We are reminded of the quote from Hall of Fame Basketball Coach Marv Harshman on his preference for tall players over fast ones: “Quick guys get tired. Big guys don’t shrink.”

Sundial Research recently noted that the performance of the Energy sector versus the S&P through Q3 2020, calculated using relative performance from 3-year highs, was the single worst showing by any S&P sector since 1928. In our 30+ years of investing, we feel like we have witnessed firsthand some brutal stretches for various sectors, including Tech/Telecom in 2000 and Financials in 2008, yet Energy has somehow managed to outdo not only those two extremes but every other one in the last 90 years… it is not surprising that its weighting in the S&P 500 has fallen by over 85% since 2014.

Norway is the poster child for going green as they are endowed with both prodigious hydropower as well as oil & gas riches to fund their transition. While EV/Hybrid autos now currently account for almost 90% of new car sales there, fossil fuel consumption has not declined measurably in the last 20 years.

Gold equities today are amongst the most profitable businesses in the entire market, with the 40% operating margins noted above roughly double the next most attractive sectors. Much of this cash generation has been channeled towards debt reduction, share buybacks and increasing dividends in a broader market that is going the opposite direction on all three. And yet they currently trade at 50%-80% discounts on a P/E basis.

It is our belief that one of the most attractive ways to express optimism regarding the growth in the green economy is via equities with exposure to large economic deposits of copper, cobalt, nickel, rare earths, silver, platinum, tin and other materials…[many of these companies] remain painted by the “commodity” brush and trade at profoundly cheap multiples. The largest platinum producer in the world, poised to benefit from the assumed exponential growth in hydrogen fuel cell demand, trades at less than 4X 2021 EPS. The world’s largest nickel producer is only modestly more expensive at 7X 2020 EPS, and several base metals royalty companies generate 10%+ free cash yields despite tremendous leverage to demand growth and higher prices for renewable energy inputs. It seems clear to us that either the market will reward these companies as their earnings, cash flows and reserve values accelerate, or the renewable companies will use their richly valued paper to secure access to their bounty via buyouts.

When one considers the combined deflationary impact of unrestricted globalization and relentlessly declining input/commodity prices over the last decade, it becomes clear that even a moderating of these trends would be incrementally inflationary. Should they reverse in force, it would likely bring out an additional effect of expanding inventory holdings, further exacerbating the inflationary impact. We consider these to be the fundamental underpinnings of re-accelerating inflation. While on their own they may lack sufficient force to overcome the powerful demographic and debt headwinds discussed below, other factors at play may well finally tilt the balance to the upside.

... a doubling of commodity prices would lead to earnings, cash flow and book values in the equities to rise anywhere from 2-5x. One can think of this in terms of an average oil company having costs of $40/bbl, so when prices go from $50 to $100 their profits rise from $10/bbl to something more like $30+ after additional taxes, etc. When one takes the next step and doubles the multiple on those higher earnings and cash flows, the end result is a rise of 300% (or much more) in the underlying equities. We must at this point reiterate, this does not get us back to peak relative valuation, or even average. This is the result of simply recovering to the worst levels ever recorded pre-2020. We can think of very few sectors with the ability to rise several fold and still be near the least expensive levels of the last 50-100 years.

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III. WEEKEND WATCHING

Courtesy of Amvest Capital: Altius Minerals Corporation directly and indirectly holds diversified royalties and streams which generate revenue from 14 operating mines. These producing royalties are located in Canada and Brazil and provide exposure to copper, zinc, nickel, cobalt, iron ore, potash, thermal (electrical) and metallurgical coal. The portfolio also includes development stage royalties in copper and renewable energy and numerous predevelopment stage royalties covering a wide spectrum of mineral commodities and jurisdictions. Altius also holds a large portfolio of exploration stage projects which it has generated for deal making with industry partners that results in newly created royalties and equity and minority interests. (Recorded March 11, 2021)

• February 24, 2017 — Fairfax to Make Strategic Investment in Altius

• April 26, 2017 — Altius and Fairfax Close Strategic Investment Transaction

IV. WEEKEND LISTENING

Courtesy of The HC Insider Podcast: In this episode Jeff Currie, Global Head of Commodity Research at Goldman Sachs, walks us through the drivers and consequences of the coming commodity super-cycle. Over the next decade, redistributive policies, energy transition and the search for new sources of old and new economy commodities will drive a macro shift in prices across all verticals. (Uploaded February 17, 2021)

ABOUT GRAHAMIAN VALUE

Founded in 2020, Grahamian Value is a open resource dedicated to the art of intelligent investing.

The co-editors of Grahamian Value, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.

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“Just keep accumulating knowledge. That’s one of the beauties of the business that Charlie and I are in, is that everything is cumulative. The stuff I learned when I was 20 is useful today. Not in necessarily the same way and not necessarily every day. But it’s useful. So you’re building a database in your mind that is going to pay off over time.”

— Warren Buffett (2001)

PART ONE.

WEEK IN REVIEW

PART TWO.

WEEKEND READING

PART THREE.

WEEKEND WATCHING

PART FOUR.

WEEKEND LISTENING

In the past week —

• There have been no changes to our Grahamian Value Classic list; one company has a material update.

BRIEF OVERVIEW —

• For your convenience, we share a compendium of key persons we’ve mentioned (so far) in our 270 day journey.

• We proudly share with you a full replay of our fireside conversation with Murray Stahl of Horizon Kinetics.

I. WEEK IN REVIEW

Updated Financials: Servotronics, Inc.

As noted last week, Servotronics filed a Notification of Late Filing for its Form 10-K. The company released its Form 10-K on April 6, 2021, reporting just under $50 million of annual revenue and $100,000 of net income.

As of December 31, 2020, Servotronics’ (unadjusted) net current asset value totaled approximately $21 million, or slightly less than $8.80 per share, comprised of $5.9 million in cash and equivalents, $7.6 million in receivables, $23.4 million in inventory, and $866,000 in other current assets; less $16.6 million in total liabilities, largely in long-term debt and a pension obligation.

This marks our twenty-sixth consecutive week with no new additions to the Grahamian Value Classic list of companies.

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II. GRAHAMIAN VALUE COMPENDIUM

We’ve shared thirty-two updates since embarking on this project in August 2020. Below is a navigational aid of key persons mentioned —

• Ackman, Bill (Pershing Square) | link

• Baesel, Jerry (JBaes & Associates) | link, link

• Barr, David (Pender) | link

• Bodnar, Nicholas (Gate City Capital) | link

• Bossert, Alex (Bossert Capital) | link

• Bourkoff, Aryeh (LionTree LLC) | link

• Brewster, Bill (Sullimar Capital Group) | link, link

• Brewer, Simon (Rothschild & Co.) | link

• Brog, Timothy (Locksmith Capital) | link, link

• Buffett, Warren (Berkshire Hathaway) | link, link

• Burry, Michael (Scion Asset Management) | link

• Carlisle, Tobias (The Acquirer’s Funds) | link, link, link

• Carret, Philip (Pioneer Investments) | link

• Campion, Will (Campion Capital) | link

• Chancellor, Edward (Financial Historian) | link

• Chandler, Christopher (Legatum) | link

• Chandler, Richard (Clermont Group) | link

• Clapham, Stephen (Behind the Balance Sheet) | link

• Cumming, Ian (Leucadia National) | link

• Cundill, Peter (The Cundill Group) | link

• Cunniff, Richard T. (Ruane, Cunniff & Goldfarb) | link

• DePodesta, Paul (Cleveland Browns) | link

• Dinsmore, James (GAMCO Asset Management) | link

• Ellis, Charles D. (Greenwich Associate) | link

• Eriksen, Tim (Cedar Creek Partners) | link, link

• Fleckenstein, Bill (Fleckenstein Capital) | link

• Flood, David J. (Private Investor) | link

• Frampton, Marcus (Alaska Permanent Fund Corporation) | link

• Gabelli, Mario (GAMCO Investors) | link

• Galbraith, Steven M. (Kindred Capital) | link

• Gill, Keith (Private Investor) | link

• Goff, John C. (Goff Capital) | link

• Goodman, George (Financial Journalist) | link

• Graham, Benjamin (Graham-Newman Corporation) | link

• Graham, Donald E. (Graham Holdings Company) | link

• Gramm, Jeff (Bandera Partners) | link, link

• Grant, Jim (Grant’s Interest Rate Observer) | link

• Grantham, Jeremy (Grantham, Mayo, & van Otterloo) | link, link

• Greenblatt, Joel (Gotham Funds) | link, link, link, link, link, link

• Hempton, John (Bronte Capital) | link, link

• Hinkie, Sam (Eighty-Seven Capital) | link

• Hohn, Chris (TCI Fund Management) | link

• Kahn, Irving (Kahn Brothers & Company) | link, link

• Kaufman, Peter D. (Glenair Inc.) | link

• Knapp, Tom (Tweedy Browne) | link

• Kovner, Bruce (CAM Capital) | link, link

• Lewis, Richard (White Stork Asset Management) | link, link

• Malone, John (Liberty Media) | link, link

• Marks, Howard (Oaktree Capital Management) | link, link, link, link

• Mauboussin, Michael J. (Counterpoint Global) | link

• McCaw, Craig (Entrepreneur) | link

• Melby, Michael (Gate City Capital) | link, link, link

• Michaelis, George H. (Source Capital) | link

• Mihaljevic, John (MOI Global) | link, link, link

• Miller, Jeremy (Author) | link

• Milne, Robert D. (Boyd, Watterson & Co.) | link

• Mitchell, Michael (Private Investor) | link

• Munger, Charlie (Berkshire Hathaway) | link, link, link

• Newberg, Bruce L. (Independent Capital Markets Professional) | link, link

• Nierenberg, David (Nierenberg Investment Management) | link

• Ordway, Phil (Anabatic Investment Partners) | link, link

• O’Shaughnessy, Patrick (OSAM) | link, link, link

• Pabrai, Mohnish (Pabrai Investment Funds) | link

• Pzena, Richard (Pzena Investment Management) | link, link, link

• Radice, Nicholas E. (Holding Company Executive) | link

• Rainwater, Richard E. (Rainwater, Inc.) | link

• Ritholtz, Barry (Ritholtz Wealth Management) | link, link

• Robotti, Bob (Robotti & Company) | link, link

• Romick, Steven (First Pacific Advisors) | link, link

• Ruane, Bill (Ruane, Cunniff & Goldfarb) | link

• Rubenstein, David (The Carlyle Group) | link

• Sansone, Christopher R. (Sansone Capital Management) | link

• Sather, Dave (Sather Financial Group) | link

• Saunders, Clarence (Piggly Wiggly) | link

• Schloss, Walter (Walter & Edwin Schloss) | link, link

• Seides, Ted (Hidden Brook Investments) | link, link

• Shapiro, Andrew (Lawndale Capital Management) | link

• Skarbeck, Ed (Aldebaran Capital) | link

• Skarbeck, Ken (Aldebaran Capital) | link

• Sosa, Richard (thinkAEN) | link, link

• Spier, Guy (Aquamarine Capital) | link

• Stahl, Murray (Horizon Kinetics) | link, link, link

• Staubach, Roger (Entrepreneur, Athlete) | link

• Taylor, Jacob (Farnam Street Investments) | link

• Templeton, John (Templeton Growth Fund) | link

• Thompson, Will (Massif Capital) | link

• Thorp, Ed (Edward O. Thorp & Associates) | link, link

• Tisch, James S. (Loews Corporation) | link

• Turner, Elliot (RGA Investment Advisers) | link, link

• Walker, Andrew (Rangeley Capital) | link, link

• “WarwickB” | link

• Watsa, Prem (Fairfax Financial Holdings) | link

• Webb, David (Webb-Site.com) | link, link

• Wilks, Dan (Wilks Brothers, LLC) | link

• Wilks, Farris (Wilks Brothers, LLC) | link

• Wilson, Robert W. (Wilson & Associates) | link

• Zapata, Michael (Sententia Capital Management) | link, link

• Zell, Sam (Equity Group Investments) | link

• Zweig, Jason (Wall Street Journal) | link, link

Public Company Executives —

• Ayers, Christopher (Universal Stainless & Alloy Products, Inc.) | link

• Bacchus, Judith (Universal Stainless & Alloy Products, Inc.) | link

• Cherechinsky, David (NOW Inc.) | link, link

• Colyer, Wilkie (Contango Oil & Gas Company) | link

• Elsztain, Eduardo (Cresud S.A) | link

• Holder, Steve (ECC Capital Corp.) | link

• Jumper, Stephen (Dawson Geophysical) | link, link, link

• Kornblatt, David (Universal Stainless & Alloy Products, Inc.) | link

• McAninch, Mac (Universal Stainless & Alloy Products, Inc.) | link

• Smith, Arthur (Mammoth Energy Services, Inc.) | link

• Taylor, Michael J. (Friedman Industries, Inc.) | link, link

• Toledano, Udi (Universal Stainless & Alloy Products, Inc.) | link

• Zimmer, Christopher M. (Universal Stainless & Alloy Products, Inc.) | link

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III. WEEKEND WATCHING

Murray Stahl of Horizon Kinetics (Co-Founder, Chief Executive Officer and Chairman of the Board) joined us in a fireside conversation on March 30, 2021 exploring intelligent investing in Japan.

We are proud to share with you a full replay —

Important Message for All Readers: 

The editorial team of Grahamian Value does not maintain accounts with, or receive compensation from Horizon Kinetics or any affiliated entities thereof.

We are not brokers or investment advisors, and do not presently manage external capital. Any information herein should not be regarded as a promotion or endorsement of Horizon Kinetics or its products or services.

We do, however, independently believe that Horizon Kinetics' thought process and approach to certain market opportunities are intriguing and (on merit alone) deserve deliberate, focused attention.

IV. WEEKEND LISTENING

Courtesy of Bloomberg’s Odd Lots, hosted by Joe Weisenthal and Tracy Alloway: When you think about the big winners in the stock market over the past couple of decades, you might think about Amazon or Apple or some other tech winner. Or maybe, if you’ve listened to Odd Lots before, you think about Domino’s Pizza. But there’s another company that’s outshone them all. Monster Beverage Corporation, the maker of the popular energy drink has been, well, a monster. In the last 20 years, the stock is up over 100,000%. On this episode, we speak with Mark Astrachan, an analyst at Stifel Financial Corp., about how they produced such a stellar return. (Uploaded February 15, 2021)

ABOUT GRAHAMIAN VALUE

Founded in 2020, Grahamian Value is a open resource dedicated to the art of intelligent investing.

The co-editors of Grahamian Value, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.

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“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

— John Templeton

PART ONE.

WEEK IN REVIEW

PART TWO.

WEEKEND READING

PART THREE.

WEEKEND WATCHING

PART FOUR.

WEEKEND LISTENING

OVERVIEW —

• There have been no changes to our Grahamian Value Classic list; one company has an update.

• We showcase highlights from the Grahamian Value Fireside Conversation with Murray Stahl of Horizon Kinetics, which took place on Tuesday, March 30, 2021.

I. WEEK IN REVIEW

This marks our twenty-fifth consecutive week with no new additions to the Grahamian Value Classic list of companies.

Notification of Late Filing: Servotronics, Inc.

Servotronics, Inc. filed an NT 10-Q on March 31, 2021 stating:

The Registrant is unable to file its Form 10-K for the year ended December 31, 2020 within the prescribed time period without unreasonable effort or expense because the Company needs additional time to complete its financial statements for the year ended December 31, 2020 and its independent registered public accounting firm will need additional time to complete its audit of such financial statements. The Registrant anticipates that it will file its Form 10-K within the fifteen-day grace period provided by Exchange Act Rule 12b-25.

Notably —

The Company anticipates reporting net income of approximately $100,000 for the fiscal year ended December 31, 2020 compared to net income of $2,109,000 for the fiscal year ended December 31, 2019.

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II. HIGHLIGHTS FROM THIS WEEK’S FIRESIDE CONVERSATION FEATURING MURRAY STAHL

One of the problems was that in the euphoric times, a lot of major Japanese companies decided that they were going to bring their subsidiaries public. So, company A owns 100% of subsidiary B, sells 20 or 30 or something percent like that into the public market. Why did they do that? Lots of reasons.

You could compensate people with publicly traded stock — not their own stocks, but subsidiary stock. If you thought that the parent company was overvalued, the subsidiaries were even more overvalued; you could raise cheap capital. Sociological reasons were something like, there can only be one CFO and one CEO; if you have very qualified people, you want to keep them — so you’d make them the CEO or the CFO of the publicly-traded company, which is a subsidiary…

All that was ultimately dysfunctional. Because what did it do? It created a whole series of publicly-traded companies in Japan. They don’t trade a lot, they don’t have high valuations, there’s no reason for them to be public. I’ll give some examples so you can see what I’m talking about…but there are lots of these companies — and little by little, the Japanese government is making little steps, not big steps; it’s putting pressure on the companies to basically take these things private. And a number of them have already been taken private. It’s a small subset of what’s happened so far, but the process only started not that many months ago. So, we’re at the beginning.

— Murray Stahl, Co-Founder, Horizon Kinetics (Tuesday, March 30, 2021)

And maybe you can’t think of any reason why it needs to be a publicly-traded company…. the investment thesis is simply that [parent companies] would buy out minority interests – if indeed, they’ll pay a control premium. And you could debate what is a control premium: 25 percent, 30 percent, 35 percent, something in that range for the investment thesis for all of these companies, even though each one is unique in itself. But the investment thesis for all the companies is that it’s really kind of, for most of the cases, a bond substitute. You’re getting almost nothing on your money. These are Graham and Dodd value. The Japanese government is pushing the parent companies to acquire these. And if it takes two or three years, you can debate what the takeover premium is going to be — if it’s a control premium, you’ll get that. Most of these companies pay dividends, you’ll get that. In most of the cases, the dividends are higher than what you can get from a money market fund. And in the fullness of time, you’ll have a low risk portfolio non-correlated with markets.

…in the 1980s, when Japan was at its apex, I encountered a situation in Canada which really radiated from World War II that all the major American companies and a lot of British companies have publicly traded subsidiaries in Canada: General Electric Canada, Ford Motor Canada, Teledyne Canada, Campbell Soup Canada—you name it. Why did it exist? Because at the end of the Second World War the Canadian government felt that the American companies and to some extent the British companies can take over all industry in Canada. So, to prevent that they basically said that if you as an American company want to really do business in Canada, you’re going to have to set up a Canadian subsidiary, take 25 or 30% of the stock as it were, and sell it into the public market, and the Canadian people can participate in that, so Canadian investors can participate in that. They actually did that. There are all sorts of tax penalties against repatriating money to the parent companies back in America, so companies had no debt and the limit to how much growth you can have in Canada, there really wasn’t the outlet to the cash on the balance sheet. Not all of them had tremendous amounts of cash on a balance sheet, although some did. Anyway, there was no reason for them to be publicly traded other than this law that dated back some decades prior. Along came Brian Mulroney, the new Canadian Prime Minister—this is late 1980s—and decided that was not a sensible thing to do. So, he replaced the Foreign Investment Review Act with something called Investment Canada that basically effectively gave the permission to the American and the British companies too, Imperial Tobacco Canada, to basically buy up their subsidiaries — which is basically what happened; it was basically a three-year process.

[The Japan Founders Index] illustrates the concept that I talk about a lot, the culture or the concept of the owner-operator. Somebody has their own capital at risk. It’s most of their money, and almost all the time they take it very seriously — and almost all the time, you get a really good outcome because people have no alternative but to take it seriously. So, it’s a different way of looking at Japan. I call it your attention and we’ve written on this subject. As I said, it’s not even an investment product, it’s just something that we have studied over the past.

GV: You shared observations about the history of Canada’s public markets and parallels to Japan today. Do you have any books or similar resources that you recommend to better understand this interesting wrinkle in financial market history?

That’s the interesting thing about Japan. The books that are really detailed don’t even get translated to English; they’re in Japanese. But I would say the first thing is, there aren’t really, there are no good, that I know of, English language books that will go through the history of Japan. So, I do recommend you just read autobiographies that are in English, and it will give you a sense of the people’s experiences as they lived it. The autobiography of Akio Morita who founded Sony, called Made in Japan. There’s another one who basically became the biggest Japanese publisher. I guess a lot of people have compared him to William Randolph Hearst, except he was far more successful from beginning to end. His name was Noma Seiji. His autobiography is called Noma of Japan. Anyway, that’s how I basically tried to acquire my knowledge from: autobiographies or actually meeting people. I don’t think there are any real good histories of these companies.

GV: When examining the set of present opportunities in Japan, how do you think about time horizons?

I don’t think you need a long time horizon. I would use 24- to 36-month time horizon for Japan. And there are a lot of reasons for that.

One of the reasons is that so uncharacteristic has been the Japanese monetary policy of the last 10-20 years. Japan is this unbelievably indebted country; it was once the exact opposite. I think the Japanese national debt, government debt, is something like 200% of GDP. They can carry it because the interest rates are basically zero. But there’s limits to how far you can push that, and I think they’re pushing it about as far as you possibly can. That’s one reason.

Then there’s another reason, and really it has to do with modern manufacturing and modern technology. We talk a lot about sustainable manufacturing. Take, for example, something as ubiquitous as your smartphone — your iPhone, or whatever. You wouldn’t believe how many unusual materials are in your smartphone, neodymium for example…

And Japan, because it’s a small place, they don’t really have a place to dump waste. They really had no choice but to figure out sustainable production technologies, and people have to co-exist with modern investing. That’s not actually true of other companies, so of other countries. So, I think the pendulum is rapidly swinging back to Japan, and I think there’s going to be something of an industrial renaissance in Japan. Not because there’s always high tech happening; it’s just because they just mastered the art of sustainable production. They just know how to do it. It’s not so easy to figure it out — and even if you figured it out, it’s decades to apply the experience.

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Important Message for All Readers: 

The editorial team of Grahamian Value does not maintain accounts with, or receive compensation from Horizon Kinetics or any affiliated entities thereof. 

We are not brokers or investment advisors, and do not presently manage outside capital. Any information herein should not be regarded as a promotion or endorsement of Horizon Kinetics or its products or services. 

We do, however, independently believe that Horizon Kinetics' thought process and approach to certain market opportunities are intriguing and (on merit alone) deserve deliberate, focused attention.

III. WEEKEND WATCHING

Courtesy of Talks at Google: Warren Buffett has said, “When I see memos from Howard Marks in my mail, they’re the first thing I open and read.” Howard Marks is the Co-Chairman of Oaktree Capital Management. He is known in the investment community for his memos to clients which detail investment strategies and insight into the economy. He treats investing as equal parts psychology and finance, and his book The Most Important Thing provides uncommon sense for the thoughtful investor. (Uploaded March 29, 2015)

IV. WEEKEND LISTENING

Courtesy of The Money Maze Podcast (hosted by Simon Brewer and Will Campion): In this episode we have the rare opportunity to talk to Sir Chris Hohn, one of the world’s most successful hedge fund managers, benefactor of the largest children’s charity (CIFF) and now agitator against corporations who are failing to properly address their climate change transition plans. (March 11, 2021 episode date)

• h/t to Joe Koster’s Value Investing World (which we highly recommend!)

ABOUT GRAHAMIAN VALUE

Founded in 2020, Grahamian Value is a open resource dedicated to the art of intelligent investing.

The co-editors of Grahamian Value, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.

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“Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.”

— Charlie Munger

PART ONE.

WEEK IN REVIEW

PART TWO.

GRAHAMIAN VALUE COMPENDIUM

OVERVIEW —

• There have been no changes to our Grahamian Value Classic list.

• For the convenience of veteran and newcomer Grahamian Value readers alike, we share a compendium of all companies we’ve mentioned.

I. WEEK IN REVIEW

This marks our twenty-fourth consecutive week with no new additions to the Grahamian Value Classic list of companies.

As a complement to our weekly electronic dispatches, we are excited to host Grahamian Value Fireside Conversations — a series of live online events (with audience participation) featuring prominent thought leaders we respect and admire, exploring the application of Grahamian Values adapted to present circumstances, rooted in a margin of safety.

Join us in an upcoming Grahamian Value Fireside Conversation — featuring Murray Stahl of Horizon Kinetics on Tuesday, March 30, 2021 at 11:00 AM in New York City, United States (UTC-4).

Advanced registration is required to participate.

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II. GRAHAMIAN VALUE COMPENDIUM

We’ve shared thirty updates since embarking on this project in August 2020; below is a quick navigational aid of all companies mentioned —

• AMREP Corporation | link, link

• Contango Oil & Gas Company | link

• Cresud S.A | link

• Daisue Construction Co., Ltd. | link

• Dawson Geophysical Co. | link, link, link, link, link, link

• ECC Capital Corp. | link

• Friedman Industries, Inc. | link, link, link, link, link, link, link

• Geospace Technology Corporation | link

• Gulf Island Fabrication, Inc. | link, link, link, link, link

• Hudson Global, Inc. | link, link

• Mammoth Energy Services, Inc. | link, link, link

• Mid-Con Energy Partners | link

• NCS Multistage Holdings, Inc. | link, link, link, link

• Newpark Resources, Inc. | link, link, link

• NOW Inc. | link, link, link, link

• P&F Industries, Inc. | link, link, link, link

• Pendrell Corp. | link, link

• Rubicon Technology, Inc. | link, link, link, link, link, link, link, link, link, link, link

• Sansei Technologies, Inc. | link

• Servotronics, Inc. | link, link, link, link, link

• Solitron Devices Inc. | link

• Tandy Leather Factory, Inc. | link

• Universal Stainless & Alloy Products, Inc. | link, link, link, link, link, link, link, link

• Westell Technologies, Inc. | link, link, link

• Yotai Refractories Co. | link

Additional companies —

• Agrofy S.A. | link

• Alleghany Capital Corp. | link

• Altech Corp. | link

• Amazon.com, Inc. | link

• American Express Company | link

• Berkshire Hathaway Energy | link

• Bethlehem Steel Corporation | link

• BrasilAgro | link

• Burlington Northern | link

• Capital Cities Communications Inc. | link

• Carnes Pampeanas | link

• Charter Medical Corporation | link

• Daily Journal Corporation | link

• Diamond Offshore | link

• Dutaland Bhd | link

• Ensco plc | link, link

• FACB Industries Incorporated Bhd | link

• Farlim Group (Malaysia) Bhd | link

• FMC Corporation | link

• fyo | link

• GameStop Corporation | link

• General Dynamics Corporation | link

• Geokinetics Inc. | link

• Greenman Brothers Inc. | link

• Hanatour Japan Co., Ltd. | link

• Holicity Inc. | link

• Home Shopping Network | link

• Hunting PLC | link

• Insas Bhd | link

• IRSA Inversiones y Representaciones Sociedad Anónima | link

• JcbNext Bhd | link

• Kanamoto Co. | link

• Kantsu Co., Ltd. | link

• Keytronic Corporation | link

• Kluang Rubber Company (Malaysia) Bhd | link

• Leucadia National Corporation | link, link

• Liberty Media Corporation | link, link

• Lion Posim Bhd | link

• Marriott Corporation | link

• Murakami Corp. | link

• National Beef | link

• Nippon Pillar Packing Co. | link

• Peerless Systems Corporation | link

• Piggly Wiggly | link

• Pulse Seismic Inc. | link

• SAExploration Holdings | link

• Sears Holdings Corporation | link, link

• Seritage Growth Properties | link

• Simon Property Group | link

• Super Rite Foods Inc. | link

• Talcott National Corporation | link

• Tazmo Co. | link

• TGS-NOPEC Geophysical Company | link

• Tosei Corp. | link

• Wells Fargo & Company | link

Important Message for All Readers: The editorial team of Grahamian Value does not maintain accounts with, or receive compensation from Horizon Kinetics or any affiliated entities thereof. We are not brokers or investment advisors, and do not presently manage outside capital. Any information herein should not be regarded as a promotion or endorsement of Horizon Kinetics or its products or services. We do, however, independently believe that Horizon Kinetics’ thought process and approach to certain market opportunities are intriguing and (on merit alone) deserve deliberate, focused attention.

ABOUT GRAHAMIAN VALUE

Founded in 2020, Grahamian Value is a open resource dedicated to the art of intelligent investing.

The co-editors of Grahamian Value, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.

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“A single conversation across the table with a wise [person] is better than ten years mere study of books.”

— Chinese Proverb

PART ONE.

WEEK IN REVIEW

PART TWO.

WEEKEND READING

PART THREE.

WEEKEND WATCHING

PART FOUR.

WEEKEND LISTENING

OVERVIEW —

• There have been no changes to our Grahamian Value Classic list.

• We showcase highlights from the inaugural Grahamian Value Fireside Conversation with Nicholas E. Radice, which took place on Thursday, March 11, 2021.

I. WEEK IN REVIEW

This marks our twenty-third consecutive week with no new additions to the Grahamian Value Classic list of companies.

Join us in an upcoming Grahamian Value Fireside Conversation — featuring Murray Stahl on Tuesday, March 30, 2021; please see the complete details here.

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II. HIGHLIGHTS FROM LAST WEEK’S FIRESIDE CONVERSATION FEATURING NICHOLAS E. RADICE

Warren Buffett often cites that “investing is most intelligent when it is most business-like”, and he’s clearly paraphrasing Graham there. On my personal journey, things have shifted more toward operations and business.

This gets to the distinction between financial markets and economic markets. We all look at financial markets; electronic quotations on a Bloomberg terminal or similar resource. Economic markets trade goods and services. The gap between them is the widest that it has been; you can see this through metrics such as the size of the total stock market, relative to GDP — at the highest that it has been.

Viscerally, and in our daily life, we find the disconnect all over. GameStop and similar situations almost have an entertainment factor; it is detached from the real world. This is not good. And it will not end well.

— Nicholas E. Radice (Thursday, March 11, 2021)

GV: Have you noticed any commonalities among your most successful investments?

NR: Yes, real assets and distress. The top four best investments, measured by total return — they all involved extreme distress. Each of the companies went into bankruptcy. It’s the lowest point at which you can buy, the bottom tick. That’s been lost nowadays, when everyone is buying high with the hope of a greater fool.

And each involved real estate as a margin of safety. That’s my signature concept: substituting real estate as an equivalent to inventory in the Graham net-net calculation. I don’t see any reason why those things aren’t equivalent. Is retail inventory — if you have a declining retailer, which would fit under Graham’s definition — is that inventory somehow more valid than prime real estate? If you own a bunch of retail inventory, it doesn’t have a huge value. You’re liquidating it at pennies on the dollar.

GV: You describe yourself as a protégé of Ian Cumming. What did you learn from the Leucadia experience?

NR: It is critical not only to focus and specialize, but also to iterate. You’ve got to keep iterating; Leucadia did that with its transactions. The first was Talcott National, which was renamed as Leucadia. Talcott had a rich history in the factoring industry, and Leucadia’s founders sold that name. I was running a small factoring business in 2010 — which is how, and when, I connected with Ian Cumming.

Ian executed the Talcott takeover and restructuring. And he realized, essentially, “We’ve got a process here, we can repeat this process, we can iterate this to a large scale” — and that’s the lesson. The fact is that if you don’t specialize, if you don’t focus, and if you don’t think about iterating — you’re simply not going to stumble into it; it just won’t happen.

GV: In your view, how have newer businesses adapted to get access to “float” or wholesale capital?

NR: Amazon essentially doesn’t make money on retail. Their signature strategy is a negative cash conversion cycle — they want very positive cash flow. Retail is almost like float, in a sense. It’s financing more valuable assets. So, they sell at breakeven — or sell at a loss — to get momentum — to get that cash flow, with a negative cash conversion cycle. And what asset did they finance? AWS. That’s why, in some respects, “the next Buffett” was Jeff Bezos.

Similarly, a situation like Facebook — does adding users, de facto, function as float? It is an interesting question. And it hits on some lessons that I learned from Peter Thiel. He’s said, “If you want to get results — find a way to compound daily. Find daily compounding.” How do you get that? Well, by adding users. That’s a common theme with PayPal and Facebook — if you sign people up, in effect, you’re compounding your business on a daily basis and it has a network effect, as value increases with more people.

And when I say, essentially, a “next Buffett,” they’re even doing deals. Look at Instagram, it’s one of the best deals of all time; a 100-bagger — off a $1 billion base.

GV: You’ve shared a thesis that the next twenty years may exhibit parallels to the 1940s and 1950s, please explain.

NR: The 1940s is by analogy — and of course it’s never going to be exactly the same. But I don’t think we’re going back to the 1980s and 1990s, certainly not a dramatic decline in interest rates. I would start with the two economic engines from roughly 1980 to 2020: interest rates and Moore’s Law. Many of the investments that have done well, they’re just linked to those. The lever is Moore’s Law. The lever is interest rates. We had double digit interest rates drop to zero, driving economic activity and a wealth transfer that were a function of interest rates.

The boom that began in the 1980s would not have been viable in the 1970s. People need to be cognizant of that. And again, it’s fundamentally business-like investing; thinking about the real world. So, those two engines — Moore’s Law and interest rates — they’re either at diminishing marginal returns or they are tapped out. And there’s evidence that they’re pretty tapped, because we’re seeing crazier and crazier behavior. What is considered “tech” also gets to differences between the 1990s and today. In the 1990s, it was actual tech; Cisco was tech, JDS Uniphase. They were technology companies.

WeWork is not a technology company. We’re seeing real estate schemes, and almost toy type companies. Snapchat — it’s an amusement; it’s entertainment. It’s not technology. But it’s valued almost equally to Goldman Sachs. Is that realistic? It’s a lot crazier this time. And I think the reason is partly that we’re no longer getting the brute-force gain from Moore’s Law. We’re also not seeing the bottom line. In the 1990s, what was Bill Gates earning, a billion dollars a month? He was making a fortune in profit. By contrast, many “tech” companies nowadays, they’re losing money. What that tells me is not only the proximate cause — they’re schemes, we can short them, whatever. But the deeper, actual driver is that we’re not getting the gains out of Moore’s Law that we were in the 1990s — when you had low-hanging fruit, when there was a tremendous tailwind.

That’s what the past forty years looked like. And when we look at the next twenty, I think they could be quite optimistic. We’ve obviously been in a dark place over the past year, but the next twenty years could be a golden age — it just depends on what you’re talking about.

Economically, a question I often ask is, when was the last time that U.S. real GDP grew at 3% or above per annum? That is trend growth, what Kuznets called Modern Economic Growth; three percent is what the economy should grow at — when is the last time we saw that? It was actually 2005. Of course, we may have a good quarter, but it’s telling that since the financial crisis, annual growth has been poor. That helps to explain a lot of what’s gone on since then; second order effects, like trying to compensate by reaching for yield, or bidding up growth companies — because GDP growth has been poor.

So, what does it mean to get back to a 1940s-like period? It means a return to trend GDP growth. The economy would feel more normal; people would get back to work. Real jobs — not Uber, not speculation. That era was a big infrastructure cycle. Infrastructure is now becoming a buzzword; which is correct, we need it. The last infrastructure cycle was during the 1940s, 1950s, 1960s. And that’s an optimistic thing; you just want to invest accordingly.

What else does it mean to get back to a postwar-type cycle: interest rates begin rising. And inflation: we had double-digit inflation in the 1940s. The Depression was analogous to this past decade, with very low interest rates during the 1930s. And then inflation started rising in the 1940s. Also, it could mean twenty years of low P/E ratios. It shouldn’t be that controversial of an expectation, over the next twenty years, that we could see multiple compression. Invest accordingly.

I had a similar conversation with someone whose family ran a large lending business in my area. During the 1970s, they were essentially shadow billionaires. They weren’t listed on Forbes, but should have been. We talked about that postwar period, the Greatest Generation. Back then, many people weren’t raging bulls on stocks. Many saved through other instruments. Why? Because — and this is critically important — stocks in real terms were a dead end throughout much of the 20th century. Stocks peaked in 1929, and we had a horrible situation in the 1930s and 1940s. Stocks came back in the 1950s, and we had a good run in the late 1960s — the Go-Go Years — but then crashed right back down in the 1970s.

By 1982, in real terms, stocks lost just as much as during the Great Depression. The inflation-adjusted S&P 500 was still at 1920s levels without including dividends. That doesn’t get talked about nowadays; that by the early 1980s, stocks were unbelievably cheap. They took a long trip to nowhere from the late 1920s until the early 1980s — for over fifty years.

That was also true of urban real estate. In the 1970s, you could buy apartments on Park Avenue, Fifth Avenue, in the hundreds of thousands of dollars. The place today where Stephen Schwarzman lives in Manhattan; it’s probably a nine-figure residence. Three floors on Park Avenue. It traded hands in 1971 for a reported $285,000. So, the urbanization we’ve seen, the takeoff of that type of real estate, throughout much of the 20th century was a dead end. It peaked in the late 1920s and then we got into a period when America suburbanized, and had very different investments that did well. During the 20th century, a lot of people saved through fixed-income instruments; they weren’t excessively exposed to equities, the way they are today.

The problem is multiple compression and inflation. It can’t be overstated how dangerous those two factors are, especially when combined. If you combine multiple compression with inflation, it is going to devastate your wealth.

---

In Berkshire Hathaway’s recent shareholder letter, Warren Buffett talks about Berkshire Hathaway Energy and Burlington Northern. If this 1940s and 1950s analogy is correct, it means that Buffett’s actions are visionary — and it means that Berkshire Hathaway could evolve into a trillion-dollar company. The fixed assets and infrastructure investment in America — if you read between the lines a little, there’s almost an implicit forecast there — that may be right or wrong; we’ll see. But it certainly looks like, in the case of Buffett, he’s placed his chips and there’s a view that one cannot inflate away the railroad. Those entities borrow at extremely low rates, Berkshire has been borrowing at very low rates — and they’ll be deeply negative real rates with a pickup in inflation. And that’s the classic Buffett move: a negative cost of capital; the insurance companies funded him at a negative cost of capital for decades. It is brilliant and hard to replicate.

11 Days Away —

UPCOMING FIRESIDE CONVERSATION FEATURING MURRAY STAHL

Following a wonderful discussion last week with Nicholas E. Radice, we are proud to announce our second Grahamian Value Fireside Conversation — featuring Murray Stahl of Horizon Kinetics, scheduled for Tuesday, March 30, 2021 at 11:00 AM Eastern Standard Time (UTC-5). Advanced registration is required to participate.

As a complement to our weekly electronic dispatches, we are excited to introduce Grahamian Value Fireside Conversations — a series of live online events featuring prominent thought leaders we respect and admire, exploring the application of Grahamian values adapted to present circumstances, rooted in a margin of safety.

Our Grahamian Value Fireside Conversations series is intended to add further context and commentary, layered on top of quality pre-existing research that has piqued our interest. Importantly, Grahamian Value Fireside Conversations are solely educational explorations that are not intended to provide individual stock pitches or be regarded as investment advice. In our view, with frictionless data, there’s an abundance of information and a scarcity of knowledge; we hope, with these conversations, to add to a marketplace of knowledge.

Direct Registration Link

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Important Message for All Readers: 

The editorial team of Grahamian Value does not maintain accounts with, or receive compensation from Horizon Kinetics or any affiliated entities thereof. 

We are not brokers or investment advisors, and do not presently manage outside capital. Any information herein should not be regarded as a promotion or endorsement of Horizon Kinetics or its products or services. 

We do, however, independently believe that Horizon Kinetics’ thought process and approach to certain market opportunities are intriguing and (on merit alone) deserve deliberate, focused attention.

(Full Disclosure: The co-editors personally own LEAPS on Berkshire Hathaway Inc.)

III. WEEKEND WATCHING

Courtesy of Pzena Investment Management: Legendary investors and long-time friends Joel Greenblatt (Gotham Funds) and Rich Pzena (Pzena Investment Management) recently sat down with investment strategist Steve Galbraith for a masterclass in value investing. The three long-time friends discussed a host of topics – including quality, momentum, interest rates, financials, ESG, disruption, parallels to the internet bubble, and their current positioning — along with the basics of how they define value. (Uploaded March 11, 2021)

IV. WEEKEND LISTENING

Courtesy of Riches in the Niches Investor Podcast (hosted by Richard Sosa of thinkAEN): Today’s master class is with James Dinsmore, portfolio manager at GAMCO Asset Management. James is focused on convertible securities. For those of you that don’t know, GAMCO is a large money management firm run by legendary investor, Mario Gabelli. On this episode, James will go over his thoughts on convertibles as well as how GAMCO adds value to clients in this niche asset class. (February 18, 2021 episode date)

• Direct Download: “A Review Of The Convertible Securities Market”

ABOUT GRAHAMIAN VALUE

Founded in 2020, Grahamian Value is a open resource dedicated to the art of intelligent investing.

The co-editors of Grahamian Value, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.

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“[Richard Rainwater] didn’t want anything just undervalued. He wanted it undervalued with an opportunity attached to it. He wanted the guy he was negotiating with to be pretty beat up. Rainwater had a keen instinct for the big picture. He’d identify his idea and put the right CEO in place. ‘Find the guy’, Rainwater preached. ‘Don’t try to be the guy.’”

— Kenneth A. Hersh (2011)

PART ONE.

WEEK IN REVIEW

PART TWO.

WEEKEND READING

PART THREE.

WEEKEND WATCHING

PART FOUR.

WEEKEND LISTENING

OVERVIEW —

• One company returns to our Grahamian Value Classic list.

• Expanding on our February 26, 2021 and March 5, 2021 observations, we continue to contemplate possible opportunities within Japanese public equity markets.

• We proudly announce our next Grahamian Value Fireside Conversation, featuring Murray Stahl of Horizon Kinetics.

I. WEEK IN REVIEW

This marks our twenty-second consecutive week with no new additions to the Grahamian Value Classic list of companies.

Due to underlying share price movement Servotronics, Inc. (again) qualifies for inclusion on the Grahamian Value Classic list; see our November 20, 2020 update for additional background.

Join us in an upcoming Grahamian Value Fireside Conversation — featuring Murray Stahl on Tuesday, March 30, 2021; please see the complete details here.

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II. CONTINUED CONTEMPLATION ON JAPAN

We understand that Michael Burry owns a collection of Japanese public equities, several of which are traditional net-nets with strong individual histories of profitability.

— Grahamian Value Week in Review (March 5, 2021)

As noted last week, a number of Michael Burry’s Japanese holdings appear to meet the criteria for “Portfolio 4” of the 1981 study by Joel Greenblatt, Richard Pzena and Bruce L. Newberg — that is, public equities which trade at a meaningful discount to liquidation value, are profitable, and often have P/E multiples no greater than five. In our experiences, such public market valuations — when observed in multiple local instances — may indicate a generalized undervaluation of underlying local businesses.

On a broader perspective, we note the viewpoints below of Horizon Kinetics (with emphasis added) —

Periodically, but very rarely, an investment opportunity in a non-U.S. stock market arises because of a regulatory or cultural change unique to that nation and to that time. It cannot be recreated anywhere else, not even on Wall Street. It typically has the character of some industry or sector that was artificially constrained for a long period of time, until the regulation or limitation outlived its usefulness or the economic distortions it created began to interfere with other policy goals. By their nature, these instances are characterized by deeply discounted valuations of the companies in question. They also are characterized by an active value realization catalyst, namely the regulatory and policy change. That makes them high-return, low-risk possibilities and also, being so idiosyncratic, uncorrelated with other asset classes. Such a process is occurring now in Japan. Japan has become of increasing interest to activist investors. They are attracted by the almost singularly low valuations and high cash balances of the publicly traded companies there. These reflect generations of cross-ownership arrangements between corporations as a defense against takeovers, as well as a proliferation of publicly listed subsidiaries that served a corporate culture of lifetime employment. It made for very inefficient operations and low returns on capital. Ownership structures are opaque, and managements have not been accountable to shareholders for capital allocation decisions, performance, or information disclosure. These practices were in fact successful: the incidence of hostile acquisitions in Japan is very, very low. Beginning several years ago, the government determined to revitalize the private corporate sector, including forcing publicly traded companies to gradually tear down the barriers to change they had built up. Since 2013, year by year, additional regulatory directives have been enacted, ranging from the inclusion of outside directors on corporate boards, to tax law changes, to a change in the market structure of the Japan Stock Exchange. These effectively place both pressure and financial incentives on public companies to eliminate their publicly traded subsidiaries, either by spin-off or by acquiring them. The government’s efforts are clearly bearing fruit, with corporate restructurings on the rise, along with hostile takeovers and the incidence of parent companies acquiring subsidiaries.

A recent rule change at the Tokyo Stock Exchange can seriously impact the listing status of both a parent company that has subsidiary and cross-holding ownership, and the subsidiary itself. This rule change has a time component to it that is intended to play out over the coming year or so. Accordingly, we expect the rate of corporate restructuring activity to accelerate. In every market, there are swathes of inefficiency. Sometimes it is information- and analysis-based, and often it is the liquidity divide – as between large companies and those of insufficient scale to interest institutional or activist investors. There are almost 4,000 listed companies in Japan, hundreds of listed subsidiaries, and a wealth of return-on-research-effort possibilities. In that regard, our Japan team, my colleagues Aya Weissman (co-Portfolio Manager and Director of Asia Strategy) and Utako Kojima (Portfolio Analyst), have been engaged in company-specific research and novel strategy development for a decade.

— “Another Uncorrelated (Temporary) Asset Class – Japan Special Opportunity Strategy,” Horizon Kinetics Q4 2020 Market Commentary (January 2021)

From our arm’s length (and armchair) perspective, Horizon Kinetics believes that Japan may present an area of opportunity that falls into Richard Rainwater’s investment framework of something that is both cheap and “with an opportunity attached” — which is distinct from simply being cheap in-and-of-itself.

Announcing a Grahamian Value Fireside Conversation with Murray Stahl

As a complement to these weekly digests, we are excited to introduce Grahamian Value Fireside Conversations — a series of live online events featuring prominent thought leaders we respect and admire, exploring the application of Grahamian values adapted to present circumstances, rooted in a margin of safety. This conversation series is primarily intended to add further context and commentary, layered on top of quality pre-existing research that has piqued our interest. Importantly, Grahamian Value Fireside Conversations are solely educational endeavors that are not intended to provide individual stock pitches or be regarded as investment advice. We intend — in a manner that is both dignified and sophisticated — to explore processes, frameworks, and (where appropriate) decision trees. In our view, with frictionless data, there’s an abundance of information and a scarcity of knowledge; we hope, through these conversations, to add to a marketplace of knowledge.

Following a most insightful discussion on Thursday, March 11, 2021 with Nicholas E. Radice, we are proud to announce our second Grahamian Value Fireside Conversation with Murray Stahl — Chairman, Chief Executive Officer, Chief Investment Officer, and Co-Founder of Horizon Kinetics.

Advance registration is required to participate.

Direct Registration Link

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“[Richard] Rainwater had a keen instinct for the big picture. He’d identify his idea and put the right CEO in place. ‘Find the guy’, Rainwater preached. ‘Don’t try to be the guy.’”

Important Message for All Readers: 

The editorial team of Grahamian Value does not maintain accounts with, or receive compensation from Horizon Kinetics or any affiliated entities thereof. 

We are not brokers or investment advisors, and do not presently manage outside capital. Any information herein should not be regarded as a promotion or endorsement of Horizon Kinetics or its products or services. 

We do, however, independently believe that Horizon Kinetics’ thought process and approach to certain market opportunities are intriguing and (on merit alone) deserve deliberate, focused attention.

III. WEEKEND WATCHING

Courtesy of Adam Smith’s Money World: George Goodman profiles John Templeton, Warren Buffett and Robert W. Wilson. (Originally aired circa 1985)

IV. WEEKEND LISTENING

Courtesy of Capital Allocators Podcast, hosted by Ted Seides (twitter): David Baran and Kazuhiko Shibata are the co-founders of Symphony Financial Partners, a twenty-year old Asia-based manager of $1.3 billion in assets. Symphony focuses on deeply undervalued companies in Japan, with a long-bias, constructive engagement strategy to work closely alongside willing management teams to see intrinsic value reflected in the share price. Our conversation covers their early careers in Japan, the country’s employee first, shareholder last culture, the resulting disconnect of corporate activity and share price, and the formation of Symphony to invest in the few companies willing to close the gap over time. We then walk through their investment process, including the challenges of taking advantage of what appears incredible value on paper, offering friendly advice as a key component of due diligence, conducting research, and structuring portfolios. We close with a discussion of corporate governance and the necessity of a long-term perspective to thrive in Japan. (February 8, 2021 episode date)

ABOUT GRAHAMIAN VALUE

Founded in 2020, Grahamian Value is a open resource dedicated to the art of intelligent investing.

The co-editors of Grahamian Value, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.

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“As Ben Graham noted in his classic, The Intelligent Investor, ‘It always seemed, and still seems, ridiculously simple to say that if one can acquire a diversified group of common stocks at a price less than the applicable net current assets alone — after deducting all prior claims, and counting as zero the fixed and other assets — the result should be quite satisfactory.’ Apparently, in today’s world of efficient markets, investors can still profit from Ben Graham’s sage advice.”

— Joel M. Greenblatt, Richard Pzena and Bruce L. Newberg (1981)

PART ONE.

WEEK IN REVIEW

PART TWO.

WEEKEND READING

PART THREE.

WEEKEND WATCHING

PART FOUR.

WEEKEND LISTENING

OVERVIEW —

• No changes to the Grahamian Value Classic list.

• We explore the early writings of Joel Greenblatt, Richard Pzena and Bruce L. Newberg.

• We proudly announce the inaugural Grahamian Value Fireside Conversation.

I. WEEK IN REVIEW

This marks our twenty-first consecutive week with no new additions to the Grahamian Value Classic list of companies.

Join us for the inaugural Grahamian Value Fireside Conversation taking place on Thursday, March 11, 2021 at 7:00 PM Eastern Standard Time (UTC-5)— featuring Nicholas E. Radice; advanced registration (direct link) is required to participate.

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II. “HOW THE SMALL INVESTOR CAN BEAT THE MARKET”

We remain most intrigued by Joel Greenblatt’s early writings as a graduate student at the University of Pennsylvania. Published in the Summer 1981 issue of Journal of Portfolio Management, Joel Greenblatt, Richard Pzena and Bruce L. Newberg studied “stocks that are selling below their liquidation value” in the period from April 1972 to April 1978.

The trio’s study “looked exclusively at three factors: (1) price in relation to liquidation value, (2) price/earnings ratio, and (3) dividend yield” — buying any stock that met the defined criteria, selling after a 100% gain or after two-years (whichever came first), while assuming an equal dollar-weighted amount invested in each stock in the portfolio.

Portfolio 1: Required a price no greater than liquidation value, an earnings yield at least twice that of the prevailing triple-A-rated bond yield, and had no dividend requirements.

During the 15 4-month periods our constraints dictated a position in the market, we averaged an annual compounded rate of return of 20.0% before dividends, commissions and taxes. The OTC index appreciated at an annual compounded rate of 1.5% during the same period.

Portfolio 2: Required a price no greater than 85% of liquidation value, an earnings yield at least twice that of the prevailing triple-A-rated bond yield, and had no dividend requirements.

After we limited the purchases in Portfolio 1 to stocks selling below 85% of liquidation value, the returns increased to a 27.1% annualized rate before dividends, commissions, and taxes (compared with the market's 1.3% annual performance). After taxes and commissions, this return approximated 16.5% annually.

Portfolio 3: Required a price no greater than liquidation value, a P/E ratio no greater than 5, and had no dividend requirements.

When we used a low constant P/E ratio coupled with a discount to liquidation value, our returns were significantly improved to a 32.3% annualized rate before dividends, commissions, and taxes. After taxes and commissions, our return falls to 20.1% per year, compared to the OTC market's return of 2.0% during the 14 periods when we had a position in the market.

Additionally, the study notes —

No stocks were purchased until August 1973 using the parameter of a PE below 5. The portfolio also entered the market closer to the trough and with more conservatively valued stocks. We outperformed the OTC index by 5% or more in 9 four-month periods, while we underperformed the market by 5% in only one period.

Portfolio 4: Required a price no greater than 85% of liquidation value, a P/E ratio no greater than 5, and had no dividend requirements.

Our most successful screen. It resulted in an annualized rate of over 42.2% before dividends, commissions and taxes. The result before dividend returns approximated 29.2% for the 14 periods studied, compared to the 2.0% annual returns of the OTC markets.

• A word from the co-editors: Among several implications from the granular data, we note the absence of net-nets from mid-1972 thru mid-1973 (and subsequent proliferation).

As explored last week, we understand that Michael Burry owns a collection of Japanese public equities, several of which are traditional net-nets with strong individual histories of profitability.

Alternatively stated, Michael Burry’s selection of small and overlooked Japanese equities squarely fit within the parameters of the above 1981 study.

III. WEEKEND WATCHING

Courtesy of Yahoo Finance: Charlie Munger speaks at the Daily Journal Corporation Annual Meeting. (Streamed live on February 24, 2021)

• Full Transcript — courtesy of Richard Lewis

Courtesy of Penn Graduate School of Education: Join us for a conversation with Donald E. Graham, chairman of the board of Graham Holdings Company (previously The Washington Post Company) and co-founder of TheDream.US; and Joel Greenblatt, W’79 WG’80, GSE Overseer, managing partner of Gotham Capital, and co-founder of Success Academy Charter Schools. They share their perspectives about some of today’s most pressing issues in education in a dialogue with Dean Pam Grossman. (Recorded on May 12, 2018)

IV. WEEKEND LISTENING

Courtesy of KindredCast: Dr. John Malone, the legendary businessman, philanthropist and conservationist, who serves as Chairman of Liberty Media, Liberty Broadband, and Liberty Global, sits down with Aryeh Bourkoff for a comprehensive discussion. The “cable cowboy” reflects back on an incredible career that has shaped the content and cable industries on a global scale. Dr. Malone also shares his thoughts on happiness in the midst of a pandemic, the state of play in the media and the frothy markets that we are seeing; he also shares his greatest hits and some very interesting misses throughout his career. (February 26, 2021 episode date)

ABOUT GRAHAMIAN VALUE

Founded in 2020, Grahamian Value is a open resource dedicated to the art of intelligent investing.

The co-editors of Grahamian Value, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.

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“I think a lot of funds get their ideas from Wall Street. I just like to find my own ideas. I read a lot. A lot of news. I just follow my nose. A lot of times it's a dead end, but sometimes there’s value there.”

— Michael Burry

PART ONE.

WEEK IN REVIEW

PART TWO.

WEEKEND READING

PART THREE.

WEEKEND WATCHING

PART FOUR.

WEEKEND LISTENING

In appreciation —

• We’re thrilled to introduce Ben Bakhshi and Giri Krishnan as new Grahamian Value Project Volunteers. Thank you for your contributions and welcome aboard!

OVERVIEW —

One company returns to our Grahamian Value Classic list.

I. WEEK IN REVIEW

This marks our twentieth consecutive week with no new additions to the Grahamian Value Classic list of companies.

Due to underlying share price movement Rubicon Technology, Inc. (again) qualifies for inclusion on the Grahamian Value Classic list; see our December 18, 2020 update for additional background.

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II. WE’RE IN GOOD COMPANY

Michael Burry owns 1,500,000 shares of NOW Inc., purchased sometime in the quarter ended December 31, 2020 — as disclosed by filings with the Securities and Exchange Commission on February 16, 2021.

While we lack visibility into Michael Burry’s underlying cost basis, we note the market capitalization of NOW Inc. dropped below the company’s net current asset value during this reporting period; relatedly, the business appeared on our Grahamian Value Classic list.

The weakness of net-nets as an actionable asset class is an inability to scale for large sums of capital — or arguably, therein lays the strength. Net-net opportunities that are both large and liquid arise (or, more accurately, collapse) from time to time, generally within a context of “localized decimation.”

As excerpted from Grahamian Value Week in Review ― October 2, 2020:

Oil and gas markets are incredibly distressed, driving a dislocation in sector market valuations. NOW Inc.’s market capitalization peaked in 2014 at roughly $4 billion and has since declined by more than 85%; with roughly 110 million shares outstanding, NOW Inc.’s present market capitalization is just under $500 million [roughly $4.50 per share].

…balance sheet (unadjusted) net current assets [at the time] totaled approximately $559 million [slightly above $5.00 per share]: $269 million of cash and cash equivalents, plus $242 million of net receivables, plus $370 million of net inventories, less $166 million of accounts payables, less $104 million in accrued expenses, and less $52 million in assorted other liabilities — with no long-term debt.

We (very conservatively) estimate that in excess of $30 million worth of NOW Inc. shares transacted at or below net-net valuation levels.

Michael Burry’s involvement in the above company from our Grahamian Value Classic list compels us to further explore Scion’s other reported holdings, particularly those outside the United States, for additional public equities with intriguing attributes.

On September 4, 2019, Bloomberg reported that Scion Asset Management had taken “major stakes” in a number of Japanese enterprises. Dr. Burry explained to Bloomberg, via an email interview:

“In many cases, the company might have significant cash or stock holdings that make up a lot of the stock price... I want to see evidence that the company is investing to grow the business, buying back stock, paying dividends, or making accretive acquisitions.”

Enunciating the reasoning behind several of his Japanese investments, we list the following point-in-time comments by Dr. Burry (arranged in alphabetical order) —

• Altech Corp. — The company “will benefit from recent immigration reforms as it expands into agriculture and patient care areas.”

• Kanamoto Co. — “They run a tight ship from a credit perspective, and maintain their equipment for high resale at auction. They also look to acquire both equipment and whole companies opportunistically, and there is a lot of room for consolidation in Japan.”

• Murakami Corp. — Burry pointed out that Murakami has cash of about 28 billion yen and stock holdings of about 2.5 billion yen, with a market value of 29.3 billion yen. “Situations like that call for more dramatic action, and I’d like to see large tender offers for 1/3 or more of the shares, large special dividends. I just have not seen that, and there is a long way to go.”

• Nippon Pillar Packing Co. — “with a high beta to the sector as the inventory of tech components is finished off and growth resumes.”

• Sansei Technologies Inc. — [The company] “should pay down debt to improve cash flow and to put it in position for another acquisition.”

• Tazmo Co. — [The company] “needs to invest in its business to develop the potential of the markets it serves.”

• Tosei Corp. — Burry sees the company as an “opportunistic player in urban real estate.” He said he likes the management team, considers the stock to be cheap at about 7 times earnings and said they have been opportunistic with share buybacks. “It is one of my larger positions because they are executing in every facet of the business, including capital allocation.”

• Yotai Refractories Co. — The company had 4.4 billion yen in cash and equivalents at the end of March. It has a market value of 13.4 billion yen.

Bloomberg’s Reed Stevenson spoke again with Dr. Burry on March 15, 2020. Addressing, in his view, why “this time is different” regarding Japan, Dr. Burry noted:

“Japan has had many false dawns yes, but the current recession and stock sell-off is clearly due to temporary external factors... This means that M&A in Japan should pick up, and yes, management is often open to this — especially in cases where the succession plan is not clear. This is a big change from my experience with management 15 years ago.”

Several factors at play seem to back up this thesis, as noted by Bloomberg:

This year [2020], Japan has seen a flurry of hostile takeover bids and moves by activist shareholders, fueling optimism they might finally shake loose cash and assets locked in the coffers of Japanese firms. Kirin Holdings Co. is being pushed by London-based Independent Franchise Partners to sell its wellness and pharmaceutical businesses, while Elliott Management Corp. has taken on SoftBank Group Corp., arguing the technology investment company should buy back shares and improve corporate governance.

“I find there is a trend here,” Burry said, adding “the basic direction is a good one.”

The table below summarizes Scion Asset Management’s current Japanese investments, as sourced from TIKR.com (which we wholeheartedly recommend!) —

From the Grahamian Value Team: We briefly explore Daisue Construction Co., Ltd. (1814), Sansei Technologies, Inc. (6357) and Yotai Refractories Co., Ltd. (5357), respectively. Hanatour Japan Co., Ltd. (6561), Kantsu Co., Ltd. (9326) and Tazmo Co., Ltd. (6266) each trade at meaningful premiums to tangible book and are best understood through a prism beyond the purview of this digest.

Daisue Construction Co., Ltd. (1814) —

Sansei Technologies, Inc. (6357) —

Yotai Refractories Co., Ltd. (5357) —

…to be continued.

III. WEEKEND WATCHING

Courtesy of UCLA: 2012 UCLA Department of Economics Commencement featuring Dr. Michael J. Burry as keynote speaker. (Uploaded June 20, 2012)

IV. WEEKEND LISTENING

Courtesy of Bloomberg’s Odd Lots, hosted by Joe Weisenthal and Tracy Alloway: Questions continue to arise over the effect of passive investing, and whether or not it’s somehow distorting the market. On this week's episode, we speak to Vincent Deluard, the Director of Global Macro for INTL FCStone Inc., who argues that the endless bid for ETFs have helped fuel a bubble in mega-cap stocks, which continue to outperform the market. (March 9, 2020 episode date)

ABOUT GRAHAMIAN VALUE

Founded in 2020, Grahamian Value is a open resource dedicated to the art of intelligent investing.

The co-editors of Grahamian Value, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.

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“We shall conclude with a practical observation that is based on experience rather than theory. When the general market is high there are always a number of individual issues that appear definitely undervalued by objective standards and consequently even more attractive in contrast to the inflated level of other stocks. The analyst may be tempted to recommend these as unusual opportunities. Not only may the ‘neglected security’ continue neglected for the remainder of the bull market, but when the downturn comes it is likely to decline in price along with the general market and to fully as great an extent. In a word, beware of ‘bargains’ when most stocks seem very high.”

— Benjamin Graham (Security Analysis, 1951 Edition, Page 30)

PART ONE.

WEEK IN REVIEW

PART TWO.

WEEKEND READING

PART THREE.

WEEKEND WATCHING

PART FOUR.

WEEKEND LISTENING

In appreciation —

• We’re thrilled to introduce Andrew Alexander, Daniel Ternes, Graham Hay, Hassan El-Essawi, Jonathan Mottola, Kyle Varrone, Salil Rajadhyaksha, and Shane Minte as our latest Grahamian Value Project Volunteers — thank you for your contributions and welcome aboard!

OVERVIEW —

Zero companies presently appear on our Grahamian Value Classic list — a wrinkle observed for the first time since inception and further discussed below.

I. WEEK IN REVIEW

This marks our nineteenth consecutive week with no new additions to the Grahamian Value Classic list of companies.

Due to underlying share price movement, Servotronics, Inc. and Rubicon Technology, Inc. no longer qualify for inclusion on the Grahamian Value Classic list.

As such, no companies presently appear on the Grahamian Value Classic list.

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II. A MESSAGE FROM THE GRAHAMIAN VALUE TEAM

For the first time, we have zero Grahamian Value Classic names on our radar —

We set out on this electronic adventure on July 13, 2020. In the 221 days since, we’ve taken note of the following Grahamian Value Classic equities (in chronological order of the company’s initial mention, herein) —

1. Friedman Industries, Inc. | link, link, link, link

2. P&F Industries, Inc. | link, link, link

3. Rubicon Technology, Inc. | link, link, link, link, link, link, link, link

4. Universal Stainless & Alloy Products, Inc. | link, link, link, link, link, link

5. Dawson Geophysical Co. | link, link, link, link, link, link

6. Mammoth Energy Services, Inc. | link, link, link

7. Servotronics, Inc. | link, link

8. NOW Inc. | link, link

9. Hudson Global, Inc. | link

10. Newpark Resources, Inc. | link, link, link

11. Gulf Island Fabrication, Inc. | link, link

12. NCS Multistage Holdings, Inc | link, link, link

And we’re intrigued by the following —

Bloomberg’s Joanna Ossinger on February 15, 2021: “…A grind higher in U.S. stocks to fresh records last week helped the VIX finish Friday’s [February 12, 2021] session down 6% to 19.97, the first sub-20 close since the pandemic rout took hold a year ago. Traders had been focusing on that level for some time as an indicator markets were back to ‘normal.’ But at the same time volatility was falling, bets on its return — via a leveraged ETF that tracks volatility futures — were soaring. Investors poured over $850 million into the ProShares Ultra VIX Short-Term Futures ETF last week, and the number of its shares outstanding has surged to a record…”

Our house view of the “stonks” market (explained) —

“So, What Now?” —

That’s precisely the question we’re asking ourselves — with regards to this weekly electronic letter and, more broadly, regarding the private capital we individually manage.

Coming Soon: Grahamian Value Fireside Conversations —

Join us as we explore this question of “So, What Now?” with key (value-oriented) thought leaders and industry veterans we particularly admire, in the weeks ahead.

III. WEEKEND WATCHING

Courtesy of Ivey Business School: Ivey Business School’s Value Investing Classes of 2011 welcomed Prem Watsa as a Guest Speaker. Mr. Watsa is the Chairman and CEO of Fairfax Financial Holdings Ltd. in Toronto, Ontario. (Uploaded October 31, 2018)

IV. WEEKEND LISTENING

Courtesy of Riches in the Niches Investor Podcast, hosted by Richard Sosa of thinkAEN: What do Endowment Investing, Real Estate, Hedge Funds, Alternatives, Over-the-Counter (OTC) Stock Investing, Stock Newsletters, Peter Kamin, SunLink Health, Libsyn and Shareholder Board Meetings all have in common you may ask? In this episode of Riches in the Niches, our guest is Marcus Frampton, CIO of Alaska Permanent Fund Corporation, who manages the $71 billion in assets for the state of Alaska. (February 12, 2021 episode date)

ABOUT GRAHAMIAN VALUE

Founded in 2020, Grahamian Value is a open resource dedicated to the art of intelligent investing.

The co-editors of Grahamian Value, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.

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“The wise investor recognizes that success is a process of continually seeking answers to new questions.”

— John Templeton

PART ONE.

WEEK IN REVIEW

PART TWO.

WEEKEND READING

PART THREE.

WEEKEND WATCHING

PART FOUR.

WEEKEND LISTENING

In the past week —

• There have been material developments at two Grahamian Value listed companies.

In appreciation —

• Kalani Scarrott (in Australia) and Ivan K. (in Europe), thank you for your contributions to this week’s issue. We’re thrilled to welcome you aboard as Grahamian Value Project Volunteers and most grateful for your unique insights.

OVERVIEW —

Based on our methodology, just two names qualify for inclusion on the Grahamian Value Classic list. Each has had material developments in the past week.

In this issue, we proudly showcase insights from Bill Ruane and Rick Cunniff through excerpts from early Sequoia Fund letters which, in our eyes, particularly resonate in the current environment — with brief commentary, where warranted.

I. WEEK IN REVIEW

This marks our eighteenth consecutive week with no new additions to the Grahamian Value Classic list of companies.

Due to underlying share price movement, Gulf Island Fabrication, Inc. and Friedman Industries, Inc. no longer meet the valuation requirement for Grahamian Value Classic list inclusion.

Changes in Beneficial Ownership: Servotronics, Inc.

FMR LLC reported a change in their beneficial ownership of Servotronics, Inc. on a Schedule 13G/A filed February 8, 2021, detailing ownership of 140,130 shares (5.6% of the company) as of the filing, an increase from 138,130 shares (5.4%) reported on February 13, 2019.

Changes in Beneficial Ownership: Rubicon Technology, Inc.

Poplar Point Capital Management LLC reported new beneficial ownership of Rubicon Technology, Inc. on a Schedule 13G filed February 10, 2021 — the fund owns 133,000 shares (5.5% of the company) as of the filing.

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II. WEEKEND READING

Timeless Insights from Bill Ruane and Rick Cunniff —

While we have a low opinion of stock market predictions and the correlation of foreign policy and the price of Capital Cities Communications, we do place the expectation of future serious inflation as the paramount factor in investment planning and stock selection. We try to analyze the effect of 8%-10% inflation on each company we study. There is a remarkable difference, for example, between the prospects of a steel company and those of a major advertising agency. One is plagued by huge costs to replace outmoded, fixed assets simply to meet competition, both domestic and foreign, in an industry with chronic overcapacity worldwide. For the most part, all reported earnings (and more) of the steel companies are devoted to this battle which has been made dramatically worse by inflation, and little is truly left for the stockholders. An advertising agency such as Interpublic, on the other hand, has almost a 15% automatic override on the growth, both real and inflationary, of the dollars spent on advertising in television, magazines and other media. Such a company has little in the way of fixed assets and no inventory, and almost all of its reportable earnings are available to the stockholders if they can’t be used internally for interesting acquisitions to further growth. 

People readily understand the inflation protection which comes from owning real assets, particularly real estate, for which there has been substantial demand, especially from abroad, in order to hedge against inflation. It is less apparent that the ownership of stocks also represents ownership in real property, and to the degree that one uses discrimination, stocks can be every bit as good a hedge against inflation as the average piece of real estate. We believe there will be greater recognition of this fact in time. — May 12, 1978

“Inflation Can Threaten Your Mental Health....”

This caption from an article in The Wall Street Journal not only alludes to the basic cause of our disorganized financial market - uncontrolled inflation - but emphasizes that there is literally no end to inflation’s negative ramifications. The New York Times recently quoted Warren Buffett, the chairman of Berkshire Hathaway, with reference to what he terms “the investor’s misery index.” In essence, the index measures the gain or loss in the investor’s purchasing power after subtracting income taxes and the inflation rate from his gross return on his invested capital. During the post-war period to date, for example, a pre-tax annual compound return of 15% would have been regarded as a superior if not handsome investment performance; most investors did not fare nearly so well. If it is assumed, however, that this return is achieved through some combination of income and capital gains, it is likely that one-third of it, or 5 percentage points, would go to taxes. If in addition to this tax effect we postulate a 10% inflation rate it is very clear that an apparently superior return is a phantom and truly represents simply the maintenance of original purchasing power. Similar arithmetic applied to a 5% passbook savings account would make the headline above even more understandable. — May 19, 1980

The much heralded two-tier market situation has obviously become blurred. A significant number of the “nifty fifty”, as they were known, have registered sharp declines from their 1973 highs, and this has caused some but by no means all major investment managers to re-think what was known as the “one decision” approach to buying common stocks. The essence of that approach was that Avon Products, Polaroid or Disney, for example, had such assured long term growth prospects that one could virtually ignore price when making a long term commitment. In remarkably short order, however, the “assured” growth prospects of each of these companies came into serious question, and all three are currently selling at prices at least 55% below their high prices of last year. — April 1, 1974

We note this research project from Alta Fox Capital, which discusses how “82% of companies from the set [future multi-baggers] traded below these multiples [3x NTM sales, 20x NTM EBITDA, 30x NTM PE] and/or without forward multiples. These leave room for multiple expansion...” One does not need to pay through-the-nose for many future multi-baggers. We specifically recall that many of today’s multi-baggers were written up on ValueInvestorsClub.com at single-digit EV/EBIT multiples. — Grahamian Value Team

The prices of most of these tangible things have increased substantially, fostering further interest. We suspect, however, that this desire to own tangible assets at any price may lead to sorry long-term results just as happened from paying exorbitant prices for America’s finest stocks in the early 1970’s. We were told the other day that a watercolor which knowledgeable antique dealers would have ignored in 1970 for as little as $25 recently was sold at auction for $9,000. Who knows if this is an appropriate price, but if the professionals were right in 1970 we hope the buyer likes to look at the watercolor — it’s a funeral scene. Actually, the Sequoia Fund has also been enthusiastically collecting what we believe to be bargain color engravings, but these are in the form of stock certificates and are bought at stock exchange auctions. We’re lovers of this form of fine art and firmly believe these values will improve with age. — February 8, 1979

We found this passage humorous; while not necessarily timely, it is certainly timeless. — Grahamian Value Team

We think the following editorial from Harper’s magazine is interesting. 

It’s a gloomy moment in the history of our country. Not in the lifetime of most men has there been so much grave and deep apprehension; never has the future seemed so incalculable as at this time. The domestic economic situation is in chaos. Our dollar is weak throughout the world. Prices are so high as to be utterly impossible. The political cauldron seethes and bubbles with uncertainty. Russia hangs, as usual, like a cloud, dark and silent, upon the horizon. It is a solemn moment. Of our troubles no man can see the end.

This particular editorial was written in 1847. We wish to thank our friend, George H. Michaelis, President of Source Capital who in his recent report to shareholders brought to our attention this Harper’s editorial. Since this editorial was written our country has grown enormously in terms of almost any economic indicator one may choose. Fears of one sort or another will always be with us, and somehow the world goes on. This fact only confirms our feeling that one should not be diverted by global concerns from recognizing outstanding opportunities in the stock market when they appear. — May 15, 1979

More timelessness. The referenced editorial could have been printed in 2020, 1990, 1979, etc., yet was from 1849. In line with the discussion of Mr. Ruane and Mr. Cunniff, we need not concern ourselves with the myriad of reasons to avoid stocks, and instead focus on spotting bargains when they come about. — Grahamian Value Team

As we commented on in our last quarterly report we are very impressed with the values offered in many of the stocks of companies with outstanding consumer brand franchises. Billions of dollars have been spent on advertising to create acceptance of these household name products, but the stocks of many of the companies who own these franchises are selling at prices which give scant recognition to the tremendous value of these intangible assets. We have built Sequoia’s stake in stocks of this category to 37% of our total net assets at present, and we expect to share fully in the fruits of their franchises whose futures seem well assured. — February 9, 1981

Bill Ruane and Rick Cunniff recognized that intangibles can have very real economic value, and intangible-heavy companies may present decent inflation hedges on their own — like the aforementioned advertising agency, which requires very little in the way of ongoing maintenance capital expenditure on tangible assets. — Grahamian Value Team

III. WEEKEND WATCHING

Courtesy of Ivey Business School: Walter Schloss was the Founder of Walter & Edwin Schloss Associates in New York. (Recorded February 12, 2008)

IV. WEEKEND LISTENING

Courtesy of The Acquirers Podcast: Tweedy, Browne Company LLC was established in 1920 as a dealer in closely held and inactively traded securities. The firm’s 100-year history is grounded in undervalued securities, first as a market maker, then as an investor and investment advisor. Benjamin Graham, through his investment firm Graham-Newman Corp., was one of the firm’s primary brokerage clients in the 1930s, 1940s, and 1950s. It was through Graham that the original partners of the firm developed brokerage relationships with investment legends Walter Schloss and Warren Buffett, and met Tom Knapp, who joined the firm in 1957 from Graham-Newman and led its conversion from broker to investor. In 1959, the partners of then Tweedy, Browne & Knapp pooled their capital in a partnership investment vehicle. In 1968, the firm accepted its first outside money management clients as limited partners of this vehicle. (March 30, 2020 episode date)

ABOUT GRAHAMIAN VALUE

Founded in 2020, Grahamian Value is a open resource dedicated to the art of intelligent investing.

The co-editors of Grahamian Value, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.

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“I have always believed that a single talented analyst, working very hard, can cover an amazing amount of investment landscape, and this belief remains unchallenged in my mind.”

— Dr. Michael J. Burry

PART ONE.

WEEK IN REVIEW

PART TWO.

WEEKEND READING

PART THREE.

WEEKEND WATCHING

PART FOUR.

WEEKEND LISTENING

In the past week —

• One business returns to the list of Grahamian Value companies.

• There have been no material developments at Grahamian Value listed companies.

OVERVIEW —

Gulf Island Fabrication, Inc. returns to the Grahamian Value Classic list, most recently explored on November 6, 2020.

A BRIEF UPDATE —

In this issue we curate several primary source documents related to the Gamestop situation, which, in the eyes of the co-editors, is a real-time case study with multiple layers of long-term implications.

I. WEEK IN REVIEW

This marks our seventeenth consecutive week with no new additions to the Grahamian Value Classic list of companies.

Due to underlying share price movement, Gulf Island Fabrication, Inc. (once again) meets the valuation requirement for inclusion on the Grahamian Value Classic list. Please refer to November 6, 2020 for further situational background.

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An Important Note for All Readers: We share the following primary source materials solely from a desire to case study the situational logic and reasoning (and facts and data) of Q3 2020 and Q4 2020. Subsequent developments, in our view, speak to topics such as market structure, market mania and, in certain instances, may arguably raise questions on the compliance of some market participants with the securities regulations. We view the present situation as one that will likely end in tears for many participants; in dismay, we watch from the sidelines. As always, the information below is intended for educational purposes and is not intended as investment advice.

II. WEEKEND READING

Part 1 of 3 | September 8, 2020 —

u/Jeffamazon: “…If you’re wondering why fund managers aren’t covering [GameStop short positions] and going long, remember that they have a JOB. They can’t make contrarian bets at the risk of looking idiotic. Cohen and Burry can because they own their own money.” Full source

Part 2 of 3 | October 11, 2020 —

u/Jeffamazon: “They say the original is always better than the sequel, but not in the case of $GME. This second leg is going to go better I than expected. And I didn't take any adderall today, so this post will be short and sweet…” Full source

Part 3 of 3 | November 30, 2020

u/Jeffamazon: “The GME story can be broken up into 2 main theses. The first is a deep value play which has credibility all on its own. The second is an infinity short squeeze like we’ve never seen before in history, which has credibility all on its own. When combining the two, you get the trade of a lifetime. In all my (albeit limited) days, I have never EVER seen a trade set up like this before. I’ve pored over every source of historical finance material I can get my hands on, and still have nothing to reference to...” Full source

III. WEEKEND WATCHING

Courtesy of ‘Roaring Kitty’ (Keith Gill): In this video I review GameStop (GME, $4.03, $260 million market cap). As of July 2020 I’m bullish on the stock – perhaps foolishly so. What are your thoughts on GME? Do you agree or disagree with my take? What did I overlook in my analysis? Which of my assumptions were off? (Recorded on July 27, 2020)

IV. WEEKEND LISTENING

Courtesy of The Wall Street Journal & Gimlet: A group of investors on Reddit are driving up the stock price of GameStop, going against Wall Street consensus that the video game retailer’s days are numbered. WSJ’s Gunjan Banerji explains how they’re working together to make the stock soar — and make a lot of money for themselves in the process. (January 27, 2021 episode date)

ABOUT GRAHAMIAN VALUE

Founded in 2020, Grahamian Value is a open resource dedicated to the art of intelligent investing.

The co-editors of Grahamian Value, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.

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“If you are in the right stocks at the wrong time, you may be right but have a long wait; at least you are better off than coming late to the party. You don’t want to be on the dance floor when the music stops.”

— George Goodman

PART ONE.

WEEK IN REVIEW

PART TWO.

WEEKEND READING

PART THREE.

WEEKEND WATCHING

PART FOUR.

WEEKEND LISTENING

In the past week —

• One business returns to the list of Grahamian Value companies.

• There have been no material developments at Grahamian Value listed companies.

OVERVIEW —

Friedman Industries, Inc. returns to the Grahamian Value Classic list, most recently explored on December 11, 2020.

A BRIEF UPDATE —

We note two classics, each of which aptly describe present circumstances:

• The Money Game, Adam Smith (1968)

• Business Adventures, John Brooks (1969)

I. WEEK IN REVIEW

This marks our sixteenth consecutive week with no new additions to the Grahamian Value Classic list of companies.

Due to underlying share price movement, Friedman Industries, Inc. (again) meets the valuation requirement for inclusion on the Grahamian Value Classic list. Please refer to December 11, 2020 and November 20, 2020 for further situational background.

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II. WEEKEND READING

(…read the full thread for the full details: Direct link)

Ultimately —

In appreciation —

III. WEEKEND WATCHING

Courtesy of Bloomberg Front Row: Jeremy Grantham, co-founder and chief investment strategist of Boston’s GMO, believes U.S. stocks have become an epic bubble and will burst in a collapse rivaling the crashes of 1929 and 2000. In this interview, he explains why, discusses the futility of Federal Reserve policy, criticizes the state of American capitalism, and shares his thoughts on gold, Bitcoin, emerging markets and climate change. He spoke exclusively to Bloomberg’s Erik Schatzker. (Recorded January 22, 2021)

IV. WEEKEND LISTENING

The Money Game
By: Adam Smith
Narrated by: David Rapkin
Length: 7 hrs and 5 mins

Publisher's Summary —

Hailed by the New York Times Book Review as “the best book there is about the stock market,” this timeless classic by the creator and host of the Emmy Award-winning TV show Adam Smith's Money World is still relevant more than 40 years later.

This essential book takes listeners to the Street to learn about the intricacies of money and how the stock market impacts every area of our lives. According to the author, the key to making wise, lucrative investments is knowing ourselves. In witty, easily accessible language, he shares pithy insights about the role of intuition and the psychology of guilt, arguing that there is no substitute for information. Smith’s Irregular Rules shatter common myths and misconceptions, revealing why nothing works all the time and illustrating how greed and fear fuel the market. Listeners will learn about the safest types of investing, the key to following market trends, and how to capitalize growth, gleaning tips on stock movers, winners and losers, and much more. Peppered with entertaining and prescient anecdotes, The Money Game analyzes who makes the really big money and explores the meaning of our desire to become rich. From selling short and buying long to Wall Street’s crowd mentality, from what constitutes a random walk to why timing is everything, this is the definitive portrait of the Street, then and now.

ABOUT GRAHAMIAN VALUE

Founded in 2020, Grahamian Value is a open resource dedicated to the art of intelligent investing.

The co-editors of Grahamian Value, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.

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“We may have a perfectly adequate way of doing something, but that does not mean there cannot be a better way. So we set out to find an alternative way. This is the basis of any improvement that is not fault correction or problem solving.”

— Edward De Bono

PART ONE.

WEEK IN REVIEW

PART TWO.

‘CARVE-OUT’ OF GRAHAMIAN VALUE SELECT

PART THREE.

WEEKEND READING

PART FOUR.

WEEKEND WATCHING

PART FIVE.

WEEKEND LISTENING

In the past week —

• No new businesses have been added to the list of Grahamian Value companies.

• There have been no material developments at Grahamian Value listed companies.

OVERVIEW —

The co-editors note just two companies remain on the Grahamian Value Classic list: Rubicon Technology, Inc. and Servotronics, Inc. In our view, this dearth of dislocation speaks to a generalized optimism across broad public markets. The co-editors continue to observe opportunity within OTC-listed companies.

I. WEEK IN REVIEW

This marks our fifteenth consecutive week with no new additions to the Grahamian Value Classic list of companies. Due to underlying share price movement, Friedman Industries, Inc., Gulf Island Fabrication, Inc. and Hudson Global, Inc. no longer meet the valuation requirement for inclusion on the Grahamian Value Classic list.

II. ‘CARVE-OUT’ OF GRAHAMIAN VALUE SELECT

Momentary tranquility (which is cyclical, in our worldview) affords us the opportunity to pursue an important strategic objective, explained below —

We are excited to redouble our efforts to identify like-quality opportunities (and similarly-qualified thought leaders) within the realm of Graham-inspired intelligent investing — on par with insights on Cresud S.A., courtesy of Nicholas E. Radice, published on January 8, 2020; it’s a high hurdle.

We believe that a “carving out” (into a standalone Grahamian Value Select offering) of this concerted effort to identify exceptional thinking (and exceptional thinkers) will best allow us to effectively execute. Relatedly, this initiative will be augmented by a growing family of Grahamian Value project volunteers — joining forces from around the world.

Going forward, you will receive (via email) —

• Grahamian Value Week in Review: monitoring developments in classical Graham-inspired opportunities (with a weekly cadence); and,

• Grahamian Value Select: crisp situational perspectives we deem both salient and timely to our sophisticated readership base (on an irregular basis, entirely merit-driven).

Previously, our weekly emails (on occasion) included: (i) featured third-party insights; and/or, (ii) situational review of companies beyond our classical net-net list. Grahamian Value Select reflects a “less is more” evolution of these two components; (far) less frequency, greater quality.

• Inspired by OID, we will release Grahamian Value Select only when fully deserving of your attention.

• In line with our larger mission, Grahamian Value Select is (and will forever remain) available on a fully-complimentary basis.

We believe this purposeful evolution will improve the experience to both our readers and our contributors, alike.

No further action is required on your part —

• Your electronic receipt of Grahamian Value Week in Review will continue uninterrupted.

• Please also look forward (on rare occasion) to receiving Grahamian Value Select in your inbox.

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III. WEEKEND READING

The Complete Letters of Nomad Investment Partnership: In [FT’s] read-through this afternoon, this one paragraph from a June 30, 2010 letter stood out on the subject of competitive dynamics —

“Take a one-big-thing-firm, such as a drug company, for example. A successful drug firm does not need to be particularly good at marketing, manufacturing, or research and development for that matter if, through a patent, it has a legal monopoly on a drug. But just look, if you will, at how fragile the drug company ecosystem is. A rival could displace it at any time with a better chemical and the firm would be left with little to fall back on, certainly not marketing, R&D, and manufacturing. Its period of exceptional profitability may therefore be quite finite and the big drug firms wrestle with this issue today.

Contrast this with a scale economics business: To better an incumbent’s cost base a rival would have to be superior at, not one thing, but a million little actions – a far harder task. Amazon’s letter to shareholders this year contains the following section:

…We believe that focusing our energy on the controllable inputs to our business is the most effective way to maximize our financial outputs over time…we’ve been using this same annual [goal setting] process for many years. For 2010, we have 452 detailed goals, with owners, deliverables and targeted completion dates.

At Amazon one employee initiative to remove the light bulbs from the vending machines (really!) saves the firm US$20,000 per annum! At the Welsh insurance company the penny dropped: firms that have a process to do many things a little better than their rivals may be less risky than firms that do one thing right because their future success is more predictable. They are simply harder to beat. And if they are harder to beat then they may be very valuable businesses indeed.”

• Direct Link

IV. WEEKEND WATCHING

Courtesy of Harvard University: Charlie Munger on The Psychology of Human Misjudgment; Abridged and Animated by Tiny Capital and Thinko Animation Studio. (Recorded June 1995)

• Full Transcript

• Full Audio

Courtesy of Cal Poly Pomona Economics Club: Peter D. Kaufman on The Mulit-Disciplinary Approach to Thinking. (Recorded on March 29, 2018)

• Full Transcript (h/t: Richard Lewis)

V. WEEKEND LISTENING

Courtesy of The Memo by Howard Marks: The dichotomy of “value” and “growth” investing has become a sharp stylistic divide. But is it helpful? In his latest memo, Howard Marks discusses how he views the art and science of value investing, especially in the increasingly efficient and complex world we face today. (January 14, 2021 episode date)

• Full Memo

ABOUT GRAHAMIAN VALUE

Founded in 2020, Grahamian Value is a open resource dedicated to the art of intelligent investing.

The co-editors of Grahamian Value, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.

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“Ben [Graham] would have, of course, been comfortable with Baron Rothschild’s summary of a lifetime’s learning: ‘Buy assets; sell earnings.’”

—Charles D. Ellis (Financial Analysts Journal; Vol. 38, No. 4)

PART ONE.

IN BRIEF: “WE’RE GROWING”

PART TWO.

WEEK IN REVIEW

PART THREE.

WEEKEND READING

In the past week —

• No new businesses have been added to the list of Grahamian Value companies.

• There have been no material developments at Grahamian Value listed companies.

I. IN BRIEF: “WE’RE GROWING”

Welcome to our new readership.

We are honored to welcome 300 new Grahamian Value subscribers in the past week; if just joining us, we encourage you to explore our 2020 Annual Letter — which explores where we’ve been and where we’re heading.

Expanding our team.

We currently seek to expand our Grahamian Value team and thereby improve upon our ability to both identify and deliver value for our readership. Please consider joining us as a project volunteer, inquire within.

Improving our platform.

In the coming week we will implement a series of platform improvements, please stay tuned for further detail in the next issue.

II. WEEK IN REVIEW

There have been no material developments at Grahamian Value listed companies.

III. WEEKEND READING

Expanded insights on “Buy assets, sell earnings” —

Wilmott Magazine — “Jerry Baesel and I spent an afternoon with Bruce [Kovner] in the 1980s in his Manhattan luxury apartment discussing how he thinks and how he gets his edge in the markets. Kovner is a generalist, who sees connections before others do. About this time he observed that large oil tankers were in such oversupply that the older ones were selling for little more than scrap value. Kovner formed a partnership to buy one. I was one of the limited partners. Here was an interesting hedge. We were partially protected against loss on the downside because we could always sell the tanker for scrap. But we had a substantial upside: Historically, the demand for tankers had fluctuated widely and so had their price. Within a few years, our refurbished 475,000 ton monster, the Empress Des Mers, was profitably plying the world’s sea lanes stuffed with oil.” Full Essay | Authored by Edward O. Thorp

• Related: The Jim Tisch $5 Million Test

FPA Crescent Fund — “Capital intensive, cyclical businesses often trade at discounts to the value of the underlying assets when their respective industry is in distress (companies are either losing money or earning less than what’s expected in a more normal environment). When earnings rebound, the market seems to forget that the businesses are cyclical. Investors begin to value them on earnings as if another downturn isn’t in the cards. Our average cost in Ensco reflects rigs purchased at a discount to a fully depreciated replacement value. Since then, its stock price has increased, along with day rates (and earnings). The company is now beginning to be considered more on a P/E basis, while at the same time, the value of the underlying rigs has begun to trade through their replacement value, reflecting the value of existing contracts and hope for a continued robust demand environment. As our margin of safety has declined, we have reduced our exposure, consistent with our initial thesis and the manner in which we invest in such industries.” Quarterly Commentary (September 30, 2012) | Authored by Steven Romick, CFA

• Related: Grahamian Value review of Friedman Industries, Inc. on December 11, 2020

ABOUT GRAHAMIAN VALUE

Founded in 2020, Grahamian Value is a open resource dedicated to the art of intelligent investing.

The co-editors of Grahamian Value, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.

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“They used to ask him: ‘Mr. Isaac, how do you measure in times of high inflation how you are doing this year?’ and he said: ‘If I have one more apartment, one more hectare of farm, one more cow.’ He measured real assets.”

— Eduardo Elsztain (on his grandfather)

PART ONE.

WEEK IN REVIEW

PART TWO.

FEATURED GUEST INSIGHT

PART THREE.

WEEKEND READING

PART FOUR.

WEEKEND WATCHING

PART FIVE.

WEEKEND LISTENING

In the past week —

• No new businesses have been added to the list of Grahamian Value companies.

• There have been no material developments at Grahamian Value listed companies.

OVERVIEW —

This marks our thirteenth consecutive week with no new additions to the Grahamian Value Classic list of companies. Due to underlying share price movement, Universal Stainless & Alloy Products and P&F Industries no longer meet the valuation requirement for inclusion on the list.

I. WEEK IN REVIEW

There have been no material developments at Grahamian Value listed companies.

II. FEATURED GUEST INSIGHT

The following is a guest contribution by Nicholas E. Radice (twitter), a New York-based investor and holding-company executive.

Important Message for All Readers: While the co-editors admire the above showcased thought leader, all opinions expressed are subject to error and the material below is intended for educational purposes only. The public equity explored below is subject to local regulations and norms. Please take careful note of the Summary of Risk Factors enumerated on Page i of this Form 20-F. Particular prudence is warranted, personal diligence is always strongly advised.

Cresud S.A., with a presence in South America, is a company engaged in the production of agricultural commodities.

Valuing Complex Real Estate Portfolios

In 2005, Bill Ackman of Pershing Square estimated Sears Holdings’ real estate portfolio to be worth over $22 billion. In 2012, Bruce Berkowitz of Fairholme Fund noted that Sears Holdings controlled more square feet than Simon Property Group—presumably implying a value in the tens of billions as well.

Today, the real estate core of Sears Holdings, spun out as Seritage Growth Properties, trades at a market capitalization of less than $600 million. After the 2010s—with situations like Sears’ demise, or energy-industry collapses such as Chesapeake—valuing and investing in large and complicated property portfolios has fallen far out of favor.

At the firm that finances our investments, we deal with operating vast and complex corporate facilities and real estate footprints. Our clients include the largest real estate owners and investors in the world. What we see in the economic performance of real estate is that it is, indeed, dominated by “trophy” assets.

Over time, most large real estate portfolios end up with value concentrated in a few assets, or possibly even a single asset. The mistake made by many investors is simply to multiply a large number of square feet or acres by an estimated average price. As seen recently with malls, the gap between the best properties—for example, Ala Moana Center in Honolulu—and merely an average property can be much wider than expected.

Thus, as a variant on Benjamin Graham’s “net-net” approach, we take the trophy-property valuation alone and subtract total debt. One might argue that Sears investors could have saved themselves billions of dollars with such a mindset; or at least recognized that, by extension, Sears’ leverage was much higher than it appeared.

Los Pozos: a Real-Asset “Net-Net”?

While not a current asset, Cresud’s Los Pozos farm alone, net of corporate debt, may be worth more than Cresud’s market capitalization. 

Located in northern Argentina, Los Pozos’ cost basis is estimated at $25 per acre—circa 1995, with financing from the Quantum Fund—a stirring investment. Its 103,784 acres devoted to livestock are now valued at roughly $3,706 per acre, or $385 million. The agricultural component, at 44,479 acres, is assessed at roughly $6,178 per acre, for a value of $275 million. In short, the productive core of Los Pozos is worth at least $660 million—just this one farm.

And yet, that productive portion is only a minority of the acreage—over 148,000 acres combined—in a total of over 590,000 acres at Los Pozos, leaving room for further development. In subtracting Cresud’s corporate net debt of $430 million, an investor is effectively paid to assume the rest of Cresud’s holdings: 1.4 million additional acres spread across South America; IRSA, essentially the “Vornado” of Buenos Aires; and miscellaneous equity stakes.

Public Equities

Many of Cresud’s assets are publicly-quoted, offering price transparency. At the time of writing, Cresud’s 62.4% stake in IRSA, traded on the NYSE, is valued at $165 million. Its 33.6% stake in BrasilAgro, also traded on the NYSE, is valued at $100 million. Thus, the combined value of those primary stockholdings is $265 million.

That value is separate from Cresud’s wholly-owned farms in Argentina and Bolivia, comprising over 1.3 million acres (or roughly 732,000 acres net of Los Pozos) and 24,000 acres, respectively.

Startup Equities

Cresud is moving downstream into processing and services. It owns three “startups” of that type: 100% of Carnes Pampeanas, a meatpacker; an agricultural broker named fyo, at 50.1%; and Agrofy, an e-commerce platform, at 22.3%.

In attempting to value those assets, we might assume a crude estimate of $40 million collectively. They may possess “optionality”; yet we use conservative, round numbers for the sake of simplicity.

Carnes Pampeanas is roughly 2% to 3% of National Beef’s size, a former Leucadia National Corporation holding that processed around five-million heads of cattle annually. By that measure—and National Beef’s exit valuation, as well as a multiple on Carnes’ $1.5 million in EBITDA—we reach a value of roughly $10 million.

In 2019, fyo reported net income of $3.46 million, from which we might assume a valuation of $20 million for that growing business. Agrofy, which has attracted venture capital, may be valued at $10 million; a dramatic discount to how this e-commerce asset would be priced in the United States.

Sum

Los Pozos, valued at $660 million, minus corporate net debt of $430 million, results in a value of $230 million.

Cresud’s publicly-quoted assets—IRSA and BrasilAgro—trade for a combined value of $265 million. Cresud’s “startup” portfolio is valued at $40 million. While unpleasant surprises may pop up, as with IRSA’s Israel assets, we assume roughly $305 million in total equities value.

In Bolivia, Cresud owns three farms devoted to crops, mainly productive surface. We use a conservative estimate of $30 million for those assets, a severe discount to recorded sales prices per acre.

In Argentina, remaining acreage is primarily a northern portfolio concentrated in a few large farms; as well as a sizable sheep estate in Patagonia. As a conservative estimate, we may view the latter, with 210,000 productive acres, as worth $30 million.

In sum, we have an estimated net asset value of $595 million—Los Pozos, equities, non-core farms—which does not include over 520,000 remaining acres devoted to agriculture and livestock in Argentina. To avoid the aforementioned “average-value fallacy” in real estate, you may choose an estimate for those, net of trade payables and other remaining liabilities. 

Land of Silver

The most common feedback we receive regarding Cresud is that it is located in Argentina. In other words, the most immediately Google-able piece of information.

One would assume that the market is aware of that fact, and it is discounted into the price. While we accept that Argentina is not the most attractive jurisdiction, what is an acceptable discount? Is no price too low?

By contrast, in failing to research business fundamentals, was a more-favorable German domicile the key for Wirecard investors in that recent episode? Is political risk higher today in Buenos Aires, or New York and Hong Kong?

Our macro view is guided by Warren Buffett’s statement twenty-six years ago, which rings just as true today: 

“We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or Treasury bill yields fluctuating between 2.8% and 17.4%.

“But, surprise – none of these blockbuster events made the slightest dent in Ben Graham’s investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.”

As of the time of this writing, both the author and the co-editors own shares of Cresud S.A. Please see important disclaimers at the end of this communication.

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III. WEEKEND READING

Harvard Business School Case 211-011: Cresud S.A., Farmer or Real Estate Developer?

November 2010, Revised February 2013: Alejandro Elsztain, CEO of Cresud S.A., is faced with the difficult choice of whether to sell, develop, or continue to hold the 151,000 hectares of remaining undeveloped farmland at the company's Los Pozos farm in Argentina. Developing the land will further expose Cresud to a variety of risks related to owning and operating farmland, but the potential financial rewards are potentially significant. As competition has increased and farmland values have skyrocketed in the last eight years, Cresud's overall corporate strategy has been to increasingly focus on development opportunities outside of the country—in areas such as Brazil, Paraguay, and Bolivia. Alejandro's looming decision on Los Pozos is, in many ways, reflective of choices facing his company in general. Authored by Ray Goldberg, Arthur I. Segel, Gustavo Herrero and Andrew Terris

Harvard Business School Case 515-043: Cresud and Argentina

January 2015: Argentina-based Cresud managed 1 million hectares (2.5 million acres) of land in South America. For 20 years, the publicly traded company’s strategy had been to acquire underutilized properties and turn them into productive farmland for cattle and crops. In 2014, Cresud's CEO wondered if the strategy was still correct in the face of falling commodity prices, more powerful input companies, and potentially positive changes in Argentina's political environment. Authored by David E. Bell and Mary Shelman

IV. WEEKEND WATCHING

Courtesy of Bloomberg QuickTake: “Eduardo Elsztain, chairman of Cresud S.A., talks with Pimm Fox (twitter) about the outlook for investment in real assets such as farms. Mr. Elsztain also discusses food production, demand and prices.” (Recorded on November 8, 2012)

V. WEEKEND LISTENING

Courtesy of John Mihaljevic (twitter):

• Investment lessons from the 1930s: Phil Ordway of Anabatic Investment Partners shares insights from a little-known book, Frederick Lewis Allen’s Since Yesterday: The 1930’s in America. We discuss historical parallels and examine how insights from past episodes can help us become better investors. During the discussion, John Mihaljevic mentions one of his favorite books on the 1920s and ’30s — Once in Golconda, by John Brooks.

• “Slow hunches” in business and investing: Elliot Turner of RGA Investment Advisers presents a key concept from Steven Johnson’s book, Where Good Ideas Come From: The Natural History of Innovation. We discuss how so-called slow hunches manifest themselves in business and investing. (December 6, 2020 episode date)

ABOUT GRAHAMIAN VALUE

Founded in 2020, Grahamian Value is a open resource dedicated to the art of intelligent investing.

The co-editors of Grahamian Value, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.

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“That day, for no particular reason, I decided to go for a little run. So I ran to the end of the road. And when I got there, I thought maybe I'd run to the end of town. And when I got there, I thought maybe I’d just run across Greenbow County. And I figured, since I run this far, maybe I’d just run across the great state of Alabama. And that’s what I did. I ran clear across Alabama. For no particular reason I just kept on going. I ran clear to the ocean. And when I got there, I figured, since I’d gone this far, I might as well turn around, just keep on going. When I got to another ocean, I figured, since I’d gone this far, I might as well just turn back, keep right on going.”

— Forrest Gump

PART ONE.

OVERVIEW

PART TWO.

YEAR IN REVIEW

In the past week —

• No new businesses have been added to the list of Grahamian Value companies.

• There have been no material developments at Grahamian Value listed companies.

I. OVERVIEW

This marks our twelfth consecutive week with no new additions to the Grahamian Value Classic list of companies. Our standard Week in Review format will return next week.

THE YEAR IN REVIEW

2020 was a year of successful foundation building. We went from “zero to one” (or, really two) to nearly one thousand. More critically, we established a consistent cadence with repeatable quality. We launched Grahamian Value on July 13, 2020 with this briefing on Westell Corporation. Subsequently, we’ve explored 17 companies and identified 83 persons of interest (in our count, which is conservatively noted).

Before further delving into details, let’s “start with why” —

• Individual Exercise. In launching Grahamian Value, we set out to compound our situational awareness and operating efficiency by a few basis points every 24 hours with deliberate practice, sustained over a (very) prolonged window. Within this framework, this weekly electronic digest and our flagship website are natural by-products of our root objective.

• A Shared Vision. Three categories of friendship exist. First, is a “friend for a purpose” — a utilitarian association dependent on reciprocal usefulness; when the usefulness disappears, the bond dissolves. Second, is a “friend for worrying” — a peer with whom to share sorrows, troubles and joys; joys when shared are multiplied while sorrows and troubles when shared are divided. Third, is a “friend for an ideal” — a shared dedication to common goals, with a readiness to sacrifice to attain these shared ideals. Within this prism, Grahamian Value is a collaboration that (deliberately) bonds the co-editors in a friendship of shared ideals for which the journey is the destination.

• A Global Think Tank. We embarked on this adventure with a viewpoint that the more we give, the more we’d get. This has proven true, in spades; the inbound (private) feedback we regularly receive is priceless, both literally and figuratively.

To recap the journey in 2020, below is an alphabetical (cumulative) list of Grahamian Value companies —

• AMREP Corporation | link

• Contango Oil & Gas Company | link

• Dawson Geophysical Co. | link, link, link, link, link, link

• Geospace Technologies Corporation | link

• Gulf Island Fabrication, Inc. | link, link

• Friedman Industries, Inc. | link, link, link, link

• Hudson Global, Inc. | link

• Mammoth Energy Services, Inc. | link, link, link

• Mid-Con Energy Partners | link

• NCS Multistage Holdings, Inc | link, link, link

• Newpark Resources, Inc. | link, link, link

• NOW Inc. | link, link

• P&F Industries, Inc. | link, link, link

• Rubicon Technology, Inc. | link, link, link, link, link, link, link, link

• Servotronics, Inc. | link, link

• Tandy Leather Factory, Inc. | link

• Universal Stainless & Alloy Products, Inc. | link, link, link, link, link, link

• Westell Technologies, Inc. | link, link

We are proud to have our own names (and reputations) associated with the above chronicled perspectives. At the same time, we’re even more gratified by the Guest Contributor insights we featured in 2020 —

• Alex Bossert (Bossert Capital), re: Solitron Devices, Inc. (October 23, 2020)

• Tim Eriksen (Eriksen Capital Management), re: Pendrell Corp. (October 23, 2020)

• Warwick B. (Oceania Value), re: Malaysian net-nets (November 6, 2020)

• David J. Flood (Elementary Value), re: ECC Capital Corp. (December 25, 2020)

Looking forward, we hope to build a fresh layer upon this foundation, at the right time and in the right way — with a strategic development that creates meaningfully greater value for a more concentrated circle of people. We will be certain to update you as we have appropriate details to share.

Not unlike Forrest Gump, we started this run with a simple desire to put one foot in front of the other. We’re today 172 days into our digital jog and find ourselves in the company of 983 welcomed co-adventurers, in a perpetual trek across the Graham-inspired investing landscape. Our email open rates are more than four-fold greater than average industry rates; we thank you for joining us in these travels and hope that you please stick around.

We wish you and your loved ones a year ahead with health, happiness, and fulfillment.

ABOUT GRAHAMIAN VALUE

Founded in 2020, Grahamian Value is a open resource dedicated to the art of intelligent investing.

The co-editors of Grahamian Value, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.

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“We make a living by what we get. We make a life by what we give.”

— Winston S. Churchill [*]

PART ONE.

WEEK IN REVIEW

PART TWO.

FEATURED GUEST INSIGHT

PART THREE.

HOLIDAY GIFT GIVING

In the past week —

• No new businesses have been added to the list of Grahamian Value companies.

• There were interesting developments at two Grahamian Value listed companies.

OVERVIEW —

This marks our eleventh consecutive week with no new additions to the Grahamian Value Classic list of companies. Due to underlying share price movement, Universal Stainless & Alloy Products is again trading at a discount to unadjusted net current asset value and therefore has been added back to the list while NCS Multistage no longer meets the valuation requirement.

As noted in last week’s issue, the Grahamian Value list of companies now reflects two distinct categories of equities:

(1) Grahamian Value Classic

• As has always been the case, major-index listed American equities trading at a discount to unadjusted net current asset value qualify for list inclusion.

(2) Grahamian Value Select

• Grahamian Value Select is a collection of asset-rich companies that fly below the radar of traditional screeners and stock selection techniques. Importantly, the sourcing process of the Grahamian Value Select leans heavily on the triangulation of behavior and portfolio positioning of a select group of Graham-inspired organizations and professionals who the co-editors believe exhibit particular talent, integrity, and aligned incentives.

I. WEEK IN REVIEW

Corporate Development: Rubicon Technology, Inc.

Rubicon Technology, Inc. announced on December 18, 2020 the extension of a Section 382 Rights Agreement to “[protect] against a possible limitation on the Company’s ability to use its net operating loss carry-forwards, which for U.S. federal income tax purposes were estimated at approximately $188.1 million as of December 31, 2019.”

Changes in Beneficial Ownership: Universal Stainless & Alloy Products, Inc.

Privet Fund LP reported a change in their beneficial ownership of Universal Stainless & Alloy Products, Inc. on a Schedule 13D filed December 11, 2020 — the fund owns 586,387 shares (6.64% of company) as of the filing, a reduction from 698,321 shares (7.91%) reported on March 25, 2020. Prior ownership filings: July 17, 2019 reporting 838,457 beneficially owned shares or 9.56% outstanding and June 26, 2019 reporting 729,463 beneficially owned shares or 8.32% outstanding.

(Full Disclosure: The co-editors personally own shares in Rubicon Technology, Inc.)

II. FEATURED GUEST INSIGHT

Important Message for All Readers: The public equity explored below is thinly-traded and not listed on a major exchange. Particular prudence is warranted, personal diligence is always strongly advised.

The following is a guest contribution by David J. Flood (twitter), a United Kingdom-based investor and entrepreneur whom the co-editors of Grahamian Value especially admire. David is the co-editor (with Jan Svenda) of Svendamanual.com, an OTC markets focused database highlighting interesting value stocks. Additionally, he is the founder of Elementaryvalue.com, a value-focused investing blog which specializes in looking at net-nets, nano-caps, OTC/Dark stocks and special situations.

ECC Capital Corp. (ECRO) was a failed subprime mortgage REIT that owned a collection of mortgage assets including a subprime book which it sold to Bear Sterns in 2006. After the sale it was left with some equity interests in various securitization trusts, a batch of performing mortgages and some litigation claims against Bear Sterns and ECC Capital Corp.’s former lawyers.

ECC Capital assumed it was free and clear of any repercussions after the sale of the subprime book to Bear Sterns but it turned out that the lawyers had messed up and the firm still had exposure. ECC Capital subsequently won 2 of its 3 litigation claims, one against Bear Sterns in 2009 and one against Latham, one of its lawyers, in 2011. The third suit against Manatt, another of its legal teams, was lost and ECC Capital had to pay out $7 million in 2016.

The last available financials for ECC Capital were from 2008 and then it moved onto the pink-sheets, stopped filing financial reports, and the news flow dried up aside from whatever updates appeared on the company website. The company made a series of cash distributions to shareholders between 2008 and 2011 and then they stopped along with the news updates. The company went dark.

In 2019 ECC Capital ‘de-REIT’ed’ and then in June 2020 the unthinkable happened: ECC Capital put out financials for the first time in over a decade. They revealed the following —

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The middle column named ‘Non-trust entities’ is the one we are interested in. It tells us that ECC Capital has net stockholder’s equity of $15,055,000 which includes $4,610,000 in cash and equivalents; total liabilities stand at $389,000. This isn’t the full picture though —

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In March 2020, ECC Capital sold its residual interests in the securitization trusts for just under $3.6 million netting a $1.4 million profit on their stated book value of $2.2 million. That means ECC Capital now has a net cash position of $7.8 million and a net book value of $16.4 million. The market capitalization currently stands at $6.6 million, meaning ECC Capital is now trading at 0.85x net cash and 0.4x net book value. Additionally, the company maintains a substantial base of NOLs to offset future taxes. The company’s Chairman and majority shareholder, Steve Holder, recently brought in a new President who is likely to focus on pursuing deals to acquire productive assets and utilize the NOL carry-forwards.

Important: Investors should take note that ECC Capital currently trades on the OTC markets and does not file with the SEC, its shares are thinly traded and its share price is volatile. A longer (and more detailed) version of this writeup is available here.

Full disclosure from the co-editors —

• David J. Flood owns shares of ECC Capital Corp. at the time of writing.

• As of the time of this writing, the co-editors do not own shares of ECC Capital Corp. Please see important disclaimers at the end of this communication.

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III. HOLIDAY GIFT GIVING

In light of the holiday season, the co-editors wish to “give” the gifts of compilations of writings from individuals and organizations whom we hold in high esteem — including Benjamin Graham (of course), Dr. Michael Burry, Berkshire Hathaway, and lastly a four-part Substack issue courtesy of new Grahamian Value team member Kalani Scarrott (more details forthcoming).

Co-Editor: This archive contains letters to shareholders of Graham-Newman Corporation, lectures Graham gave at Columbia Business School, and select other works. Duly noted are Graham’s ever-present focus on intellectual rigor and a scientific, heavily quantitative, approach to markets.

From Page 378: “There is undoubtedly an organic but inverted relationship between the growth stock concept and the theory of undervalued securities. The attraction of growth is like a tidal pull which causes high tides in one area, the assumed growth companies, and low tides in another area, the assumed non-growth companies.”

Co-Editor: While not the most well-known writings of the investment world, I hold a deep appreciation for the periodic letters that Michael Burry sent to investors while running Scion Capital, LLC — and believe that his disregard for the viewpoints of fellow market participants is one that all too often is lacking in this field.

From Page 14: “…most in the market treasure the dollar bill that consistently sells for $1.10 or more — as long as it consistently does so. In short, volatility is on sale because 99+% of the institutions out there are doing their best to avoid it — under the mistaken but Nobel Prize-winning impression that volatility and risk have some relation. Those of us that feel affection for volatility therefore hold title to the most disabused yet undervalued quality that the markets have to offer.”

Co-Editor: Bill shared the link below with me earlier this year and the site is an exceptional “signal to noise” resource of primary source documents for all-things Berkshire Hathaway (plus Blue Chip Stamps, Wesco Financial, and more); delighted to “pay it forward” and hope you similarly enjoy.

Co-Editor: The overnight success (that’s been years in the making) of Curated by Kalani is entirely deserved as the quality speaks for itself; I think you’ll likewise recognize and appreciate the care that’s embedded in Kalani’s work. Below you’ll find the digital gift of his collected insights.

ABOUT GRAHAMIAN VALUE

Founded in 2020, Grahamian Value is a open resource dedicated to the art of intelligent investing.

The co-editors of Grahamian Value, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.

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“Billy, this is Chad Bradford. He’s a relief pitcher. He is one of the most undervalued players in baseball. His defect is that he throws funny. Nobody in the big leagues cares about him, because he looks funny… This guy should cost $3 million a year. We can get him for $237,000.”

— Peter Brand (Moneyball [movie], 2011)

PART ONE.

WEEK IN REVIEW

PART TWO.

SITUATIONAL OVERVIEW

PART THREE.

WEEKEND READING

PART FOUR.

WEEKEND WATCHING

PART FIVE.

WEEKEND LISTENING

In the past week —

• No new businesses have been added to the list of Grahamian Value companies.

• There were interesting developments at three Grahamian Value listed companies.

OVERVIEW —

This marks our tenth consecutive week with no additions to the list of Grahamian Value companies. We’re now beginning to remove businesses from the list as public market capitalization exceeds corporate (unadjusted) net current asset value. A shrinking list of Grahamian Value names is meaningfully different than a stagnant list — a key development noted internally.

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I. WEEK IN REVIEW

Corporate Development: Mammoth Energy Services, Inc.

Mammoth Energy announced on December 8, 2020 receipt of additional data from the Federal Emergency Management Agency regarding a longstanding and ongoing business dispute.

Corporate Development: NCS Multistage Holdings, Inc.

NCS Multistage disclosed on a Form 8-K filed December 10, 2020 —

…the agreements entered into by Repeat Precision, LLC (“Repeat Precision”), a controlled joint venture subsidiary of NCS Multistage Holdings, Inc. (the “Company”), in connection with the settlement of Repeat Precision’s claims in the Diamondback Industries, Inc. Chapter 11 bankruptcy became effective and Repeat Precision received the upfront consideration previously disclosed in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020.

Key excerpts from the above referenced Form 10-Q (filed November 5, 2020) —

In October 2020, we entered into an agreement to settle the Award entered into by the District Court, which will be effectuated through a Chapter 11 plan of reorganization that was filed by Diamondback and is currently set for confirmation on November 12, 2020. The agreement terminates if the bankruptcy court does not approve the plan by December 31, 2020. In connection with Repeat Precision releasing Diamondback and Derrek Drury (“Drury”) from the monetary damages in the Award and certain other claims, Repeat Precision expects to receive: (i) an upfront cash payment of approximately $15.5 million, (ii) the transfer of the ‘035 Patent from Diamondback to Repeat Precision, (iii) payments for future sales of certain setting tool sold by Diamondback or its successor as restitution, until $5 million has been paid in total, and (iv) a note from Drury payable in two years in the principal amount of up to $5 million secured by certain properties and other collateral.

The co-editors feel that it is appropriate to privately adjust the net asset value calculation to incorporate this recent development. As noted previously (Grahamian Value Week in Review — November 6, 2020), NCS Multistage reported slightly more than $20.00 per share (post-reverse split) of unadjusted net current asset value as of September 30, 2020 — then comprised of $8.6 million in cash and equivalents, $24.5 million in receivables, $36.5 million in inventory, and $3.2 million in other current assets; less $24.6 million in total liabilities, largely in $3.1 million of payables, $3.59 million of accrued expenses, and non-current, long-term debt and lease obligations of $8.9 million.

Industry Development: P&F Industries, Inc.

P&F’s Form 10-Q for the quarter ending September 30, 2020 includes the following language:

The ongoing grounding by the Federal Aviation Administration of Boeing’s 737 MAX aircraft, and the dramatic reduction in staffing levels across all of Boeing’s facilities due to the COVID pandemic have greatly reduced production activity at Boeing. As long as the 737 MAX is grounded, it will likely continue to have an adverse effect on our revenue.

Subsequent to this filing, the co-editors understand that:

1. “The Federal Aviation Administration lifted its ban on the Boeing 737 Max”

2. “In a boost for Boeing, Ryanair orders 75 additional 737 MAX planes”

(Full Disclosure: The co-editors personally own shares in P&F Industries, Inc.)

II. SITUATIONAL OVERVIEW: RUBICON TECHNOLOGY, INC.

Full Disclosure: At the time of publishing, the co-editors of Grahamian Value own shares of Rubicon Technology stock.

In the company’s own words —

[Rubicon Technology]… is an advanced materials provider specializing in monocrystalline sapphire products for optical systems and specialty electronic devices… [and] is a specialized pharmacy that provides prescription medications, over-the-counter drugs and vitamins to patients being discharged from skilled nursing facilities and hospitals... [and] is exploring various alternatives… including potentially… acquiring an existing business, establishing a new venture…

If the company is not already “misfit” enough: Rubicon’s backstory includes a corporate saga involving operations in Malaysia, while Yahoo Finance documents a $22 million public equity sporting a -18.8% operating margin and -$0.28 of earnings per share.

Yet, among the Grahamian Value Classic list, Rubicon Technology stands out as uniquely intriguing to the co-editors — for three reasons: a clean net asset value, clear insider incentives, and a compelling situational setup.

i. Clean Net Asset Value —

• From a pure balance sheet standpoint, Rubicon had a net current asset value of just over $27 million as of September 30, 2020. This was comprised of $10.3 million in cash, $14.7 million in short-term investments, $703,000 in receivables, $1 million in inventories, $1 million in assets held for sale, and about $281,000 in other current assets. Rubicon had $893,000 in total liabilities. Additionally, Rubicon had about $2.5 million in carrying value of property and equipment.

• Almost entirely in highly liquid assets, this composition of net asset value is remarkably clean and amounts to slightly more than $11 per share of net current asset value and roughly $12.50 per share of book value, presuming 2.4 million shares outstanding.

• As noted in last week’s Grahamian Value Week in Review, Rubicon expects net proceeds of $725,000 from the recent sale of non-core assets.

ii. Clear Insider Incentives —

• Timothy Brog joined Rubicon in May 2016 as a board member and was appointed the company’s President and Chief Executive Officer effective March 17, 2017. Prior to Rubicon, Mr. Brog served as Chairman of the Board of Directors of Peerless Systems Corporation from June 2008 to February 2015, Chief Executive Officer from August 2010 to March 2015 and a director beginning in July 2007.

• In the co-editors’ view, understanding the incentive structure in place for Mr. Brog at Rubicon is helpful towards assessing the company’s broader roadmap. Rubicon’s latest definitive proxy statement (filed June 15, 2020) reads as follows:

Goal 1: Progress towards an acquisition

The Board wishes to incentivize Mr. Brog to further develop the Company’s acquisition pipeline, with the ultimate goal of finding suitable acquisition targets and eventually closing a transaction. To achieve Goal 1, the Board wants to see material progress from Mr. Brog in improving deal-flow and allocating more time to the search for acquisitions. A signed purchase agreement or the actual consummation of an acquisition would also satisfy Goal 1.

Goal 2: Signed purchase agreements for the Malaysia properties

The Board believes the Company’s assets in Malaysia continue to be an unwanted distraction from Rubicon’s domestic operations. Mr. Brog would achieve Goal 2 by negotiating and signing a purchase agreement for one or both of the Malaysia properties with Board approval. Material progress in finding a buyer for the properties will also be considered by the Board for achieving Goal 2.

Goal 3: 2019 Year-End Cash

Similar to in 2018, the Board wishes to incentivize Mr. Brog in his efforts to preserve capital… The 2019 YE Cash would be adjusted for any unusual items that occur in 2019…

iii. Compelling Situational Setup —

• The co-editors are impressed with Mr. Brog’s record of shareholder value creation at Peerless Systems between 2007 and 2014. Also noteworthy, Jeff Gramm (Bandera Partners) owns roughly 10% of Rubicon’s shares outstanding while Michael Zapata (Sententia Capital Management) owns slightly more than 5%.

• In the co-editors’ view, both Mr. Gramm and Mr. Zapata are particularly well-versed in corporate governance matters and out of self-interest (for individual-specific reasons beyond the scope of this digest) are deemed likely to respect minority-shareholder interests at Rubicon.

Similar to the Oakland A’s pitcher Chad Bradford mentioned in the opening quotation, Rubicon “looks funny.” A surface level assessment of Rubicon is off-putting (at best) — whereas a more granular exploration could lead to a company singularly focused on creating shareholder wealth, valued at a discount to scrap. While the public equity is unlikely to garner much attention from the more traditional “big league” market participants, language below from a December 16, 2020 press release points to one (well-informed) interested market constituent (emphasis added):

Rubicon Technology, Inc. (“RTI”) had previously implemented a stock repurchase plan to repurchase up to $3 million of its common stock in November 2018. In July 2020, RTI used up all of the remaining amount of such initial $3 million authorization. Today, RTI announced that its Board of Directors has authorized another stock repurchase plan to purchase up to an additional $3 million of its common stock from time to time through open market and private transactions…

“With the sale last week by RTI of its ownership in Rubicon Sapphire Technology (Malaysia) SDN BHD, the liquidation of all of RTI’s material excess assets and the consolidation of our operating facilities, is now complete. In our opinion, shares of Rubicon’s common stock are currently trading at a discount to its intrinsic value and it is a good use of our capital to repurchase our common stock at favorable prices,” said Timothy Brog, Rubicon’s Chief Executive Officer.

Give the gift of Grahamian Value Week in Review this holiday season to a cherished colleague or associate — a perfect digital stocking stuffer for the discerning deep value enthusiast!

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III. WEEKEND READING

What are the traits to be a great investor?

Charlie Munger: Obviously you have to know a lot. But partly it’s temperament. Partly it’s deferred gratification. You got to be willing to wait. Good investing requires a weird combination of patience and aggression and not many people have it. It also requires a big amount of self-awareness and how much you know, and how much you don’t know. You have to know the edge of your own competency. And a lot of brilliant people are no good at knowing the edge of their own competency. They think they’re way smarter than they are. And of course, that that’s dangerous and it causes trouble. I think Caltech would have a hard time teaching everybody to be a great investor.

Could [Caltech] help people discover that they have that temperament? Or is this something that you mostly should try on your own?

Charlie Munger: I think you find out whether you’ve got the qualities to win at poker by playing poker… Obviously, it helps to know the basic math of Fermat and Pascal. But everybody with any sense knows that stuff. Having the temperament where Fermat and Pascal are as much as part of you as your ear and nose, that’s a different kind of a person. And I think it’s hard to teach that. I have found — Warren and I have talked about this — in the early days when we talked about our way of doing things, which was working so well, we found some people got it, and they instantly converted to our way and did very well. And some people, no matter how carefully we explained it, and no matter how successful they were, they could never learn — they could never adapt it. They either got it fast or they didn’t get it at all. That’s my experience.

• Full transcript of Caltech talk, recorded December 14, 2020; courtesy of Richard Lewis (twitter)

• Direct link to full video

IV. WEEKEND WATCHING

Michael Lewis: “The [Oakland A’s] players are coming out of the showers and they’re all naked I thought, ‘My God, that is a really unattractive group of men.’ The baseball uniform covers up a lot and these guys, they were all fat or misshapen in some way — it was everything, every problem but kind of missing limbs. And I thought if you line those people, those naked bodies up against the wall and ask someone what they do for a living, no one would guess they were professional athletes. The then second-in-command in the front office said, ‘You know, in a funny way, that’s exactly the point. We’re in the business of finding defective players, because if a player doesn’t have something wrong with him, if he’s not defective in some way, the market values him properly and we can’t afford him. What excites me is when I find some player who has some glaring and obvious surface defect — but it actually doesn’t matter to his value as a baseball player.’”

Paul DePodesta: “We tend to focus on physical appearances and in baseball, or in sports, this might seem to make sense. Every scout out there is looking for the six foot three, 205 pound stallion or that Silky Sullivan with the great body who could just do it all. The problem is that that doesn’t always translate into success. Imagine in the decisions you have to make — imagine if you were doing a write up on a company and you met with the CEO and the management team, and you came back and your analysis basically said, ‘Well the CEO seems smart, he’s got a good body on him. I think we should go with this guy.’ It seems ridiculous, right? I got a great statistic from Malcolm Gladwell: ‘3.8% of all adult males are taller than six foot two, 3.8%, and yet 30% of all fortune 500 CEOs are taller than six foot two.’ So, maybe it’s not just the baseball scouts who have this bias…”

V. WEEKEND LISTENING

Courtesy of Invest Like The Best: Sam Hinkie (twitter), founder of Eighty-Seven Capital, joins Patrick O’Shaughnessy (twitter) in long-form conversation. Sam worked for more than a decade in the NBA with the Houston Rockets and then as the President and GM of the Philadelphia 76ers. (December 15, 2020 episode date)

• Full show notes and transcript. (direct link)

• Sam Hinkie’s resignation letter to 76ers’ ownership. (direct link)

Courtesy of The Business Brew: Tobias Carlisle (twitter), founder and managing director of Acquirers Funds and author of Deep Value, joins Bill Brewster (twitter) of Sullimar Capital Group in sophisticated, long-form conversation. (December 11, 2020 episode date)

ABOUT GRAHAMIAN VALUE

Founded in 2020, Grahamian Value is a open resource dedicated to the art of intelligent investing.

The co-editors of Grahamian Value, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.