(Image:  Zen Buddha Silence by Marilyn Barbone.)

February 13, 2022

Cogstate Ltd. (COGZF) makes computerized cognition tests that are used in Australia and internationally.  These tests so far have been chiefly used as endpoints or inclusion criteria in clinical trials that involve cognition (Alzheimer’s, schizophrenia, etc.).  See here for demonstrations of their various tests:

The greatest opportunity for Cogstate is for its tests to be used as screening tests for Alzheimer’s.  But this won’t happen until an effective treatment for Alzheimer’s is developed.  In the meantime, there is a large opportunity for Cogstate’s tests to be increasingly used in clinical trials that involve cognition.

A clinical trial for an Alzheimer’s drug can cost $1 billion.  Cogstate’s tests usually cost less than $10 million per trial.  Pharmaceuticals are more than willing to pay $10 million for a high-quality and proven cognitive test.  Pharmaceuticals are not willing to try an unproven cognitive test.

I assume 45% growth in revenues in 2022 and 25% growth in revenues in each of the following years: 2023, 2024, 2025, 2026, and 2027.  That makes revenues in 2027 equal to $148.8 million.

I assume EBITDA margin of 35% in 2027.  We get the following estimates for 2027:  $52.1 million EBITDA, $36.5 million cash flow, and $37.2 million net income.

Using these figures, we get the following multiples:

    • EV/EBITDA = 4.04
    • P/E = 6.24
    • P/B = 1.80
    • P/CF = 6.37
    • P/S = 1.56

Cogstate has a Piotroski F_Score of 7, which is good.

Insider ownership is over 38%, which is excellent.  This includes Martyn Myer, who founded Cogstate in the 1990s and owns 13.7%.  It also includes David Dolby, who owns 15.1%.  David’s father Ray Dolby founded Dolby Laboratories and suffered from Alzheimer’s late in his life.  Eisai Co., Ltd., owns 6.8%.  And the CEO Brad O’Connor owns 3%.

Net debt is very low:  Cash is $23.6 million, while debt is $1.7 million.  TL/TA is 54%, which is good.

Intrinsic value scenarios:

    • Low case: Revenue in 2027 may reach $60 million and net income $12 million.  At a P/E of 15, the stock would be worth $1.04, which is 22% lower than today’s $1.34.
    • Mid case: Revenue in 2027 could reach $148.8 million and net income $37.2 million.  At a P/E of 20, the stock would be worth $4.29, which is 220% higher than today’s $1.34.  The CAGR in the stock price would be 26.2%.
    • High case: Revenue in 2027 could reach $190 million and net income $47.5 million.  At a P/E of 25, the stock would be worth $6.85, which is over 410% higher than today’s $1.34.  The CAGR in the stock price would be 38.6%.
    • Very high case:  Cogstate’s tests could be used globally as screening tests for Alzheimer’s.  Revenue in 2027 could reach $400 million and net income $100 million.  At a P/E of 25, the stock would be worth $14.42, which is over 975% higher than today’s $1.34.  The CAGR in the stock price would be 60.8%. good essay structure examples go can you buy viagra shoppers mart source see enter site source como se usa kamagra gel oral follow site la viagra pfizer kamagra srpski erika gertsog viagra byu essay tips edexcel pe coursework get link how often do you take female viagra philippines thesis viagra buy online ireland essay today's readers tomorrow's leader quickest generic viagra delivery click here cover letter receptionist here viagra and other stimulants propecia scam Risks

The biggest risk is competition.  But the largest competitor to Cogstate’s tests is the CANTAB offering from Cambridge Cognition.  This product does much less in sales.

Also, this is not a winner-take-all industry.  Most Alzheimer’s clinical trials use over a dozen cognitive tests as inclusion criteria or endpoints.  Cogstate doesn’t have to steal share to win because pharmaceuticals are happy to add another validated test to their trials.



An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.


If you are interested in finding out more, please e-mail me or leave a comment.

My e-mail:




Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

Common Stocks and Common Sense

(Image:  Zen Buddha Silence by Marilyn Barbone)

February 6, 2022

It’s crucial in investing to have the proper balance of confidence and humility.  Overconfidence is very deep-seated in human nature.  Nearly all of us tend to believe that we’re above average across a variety of dimensions, such as looks, smarts, academic ability, business aptitude, driving skill, and even luck (!).

Overconfidence is often harmless and it even helps in some areas.  But when it comes to investing, if we’re overconfident about what we know and can do, eventually our results will suffer.

(Image by Wilma64)

The simple truth is that the vast majority of us should invest in broad market low-cost index funds.  Buffett has maintained this argument for a long time:

The great thing about investing in index funds is that you can outperform most investors, net of costs, over the course of several decades.  This is purely a function of costs.  A Vanguard S&P 500 index fund costs 2-3% less per year than the average actively managed fund.  This means that, after a few decades, you’ll be ahead at least 80% (or more) of all active investors.

You can do better than a broad market index fund if you invest in a solid quantitative value fund.  Such a fund can do at least 1-2% better per year, on average and net of costs, than a broad market index fund.

But you can do even better—at least 8% better per year than the S&P 500 index—by investing in a quantitative value fund focused on microcap stocks.

  • At the Boole Microcap Fund, our mission is to help you do at least 8% better per year, on average, than an S&P 500 index fund.  We achieve this by implementing a quantitative deep value approach focused on cheap micro caps with improving fundamentals.  See:


I recently re-read Common Stocks and Common Sense (Wiley, 2016), by Edgar Wachenheim III.  It’s a wonderful book.  Wachenheim is one of the best value investors.  He and his team at Greenhaven Associates have produced 19% annual returns for over 25 years.

Wachenheim emphasizes that, due to certain behavioral attributes, he has outperformed many other investors who are as smart or smarter.  As Warren Buffett has said:

Success in investing doesn’t correlate with IQ once you’re above the level of 125.  Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.

That’s not to say IQ isn’t important.  Most of the finest investors are extremely smart.  Wachenheim was a Baker Scholar at Harvard Business School, meaning that he was in the top 5% of his class.

The point is that—due to behavioral factors such as patience, discipline, and rationality—top investors outperform many other investors who are as smart or smarter.  Buffett again:

We don’t have to be smarter than the rest; we have to be more disciplined than the rest.

Buffett himself has always been extraordinarily patient and disciplined.  There have been several times in Buffett’s career when he went for years on end without making a single investment.

Wachenheim highlights three behavioral factors that have helped him outperform others of equal or greater talent.

The bulk of Wachenheim’s book—chapters 3 through 13—is case studies of specific investments.  Wachenheim includes a good amount of fascinating business history, some of which is mentioned here.

Outline for this blog post:

  • Approach to Investing
  • Being a Contrarian
  • Probable Scenarios
  • Controlling Emotions
  • IBM
  • Interstate Bakeries
  • U.S. Home Corporation
  • Centex
  • Union Pacific
  • American International Group
  • Lowe’s
  • Whirlpool
  • Boeing
  • Southwest Airlines
  • Goldman Sachs

(Photo by Lsaloni)



From 1960 through 2009 in the United States, common stocks have returned about 9 to 10 percent annually (on average).

The U.S. economy grew at roughly a 6 percent annual rate—3 percent from real growth (unit growth) and 3 percent from inflation (price increases).  Corporate revenues—and earnings—have increased at approximately the same 6 percent annual rate.  Share repurchases and acquisitions have added 1 percent a year, while dividends have averaged 2.5 percent a year.  That’s how, on the whole, U.S. stocks have returned 9 to 10 percent annually, notes Wachenheim.

Even if the economy grows more slowly in the future, Wachenheim argues that U.S. investors should still expect 9 to 10 percent per year.  In the case of slower growth, corporations will not need to reinvest as much of their cash flows.  That extra cash can be used for dividends, acquisitions, and share repurchases.

Following Warren Buffett and Charlie Munger, Wachenheim defines risk as the potential for permanent loss.  Risk is not volatility.

Stocks do fluctuate up and down.  But every time the market has declined, it has ultimately recovered and gone on to new highs.  The financial crisis in 2008-2009 is an excellent example of large—but temporary—downward volatility:

The financial crisis during the fall of 2008 and the winter of 2009 is an extreme (and outlier) example of volatility.  During the six months between the end of August 2008 and end of February 2009, the [S&P] 500 Index fell by 42 percent from 1,282.83 to 735.09.  Yet by early 2011 the S&P 500 had recovered to the 1,280 level, and by August 2014 it had appreciated to the 2000 level.  An investor who purchased the S&P 500 Index on August 31, 2008, and then sold the Index six years later, lived through the worst financial crisis and recession since the Great Depression, but still earned a 56 percent profit on his investment before including dividends—and 69 percent including the dividends that he would have received during the six-year period.  Earlier, I mentioned that over a 50-year period, the stock market provided an average annual return of 9 to 10 percent.  During the six-year period August 2008 through August 2014, the stock market provided an average annual return of 11.1 percent—above the range of normalcy in spite of the abnormal horrors and consequences of the financial crisis and resulting deep recession.

(Photo by Terry Mason)

Wachenheim notes that volatility is the friend of the long-term investor.  The more volatility there is, the more opportunity to buy at low prices and sell at high prices.

Because the stock market increases on average 9 to 10 percent per year and always recovers from declines, hedging is a waste of money over the long term:

While many investors believe that they should continually reduce their risks to a possible decline in the stock market, I disagree.  Every time the stock market has declined, it eventually has more than fully recovered.  Hedging the stock market by shorting stocks, or by buying puts on the S&P 500 Index, or any other method usually is expensive, and, in the long run, is a waste of money.

Wachenheim describes his investment strategy as buying deeply undervalued stocks of strong and growing companies that are likely to appreciate significantly due to positive developments not yet discounted by stock prices.

Positive developments can include:

  • a cyclical upturn in an industry
  • an exciting new product or service
  • the sale of a company to another company
  • the replacement of a poor management with a good one
  • a major cost reduction program
  • a substantial share repurchase program

If the positive developments do not occur, Wachenheim still expects the investment to earn a reasonable return, perhaps close to the average market return of 9 to 10 percent annually.  Also, Wachenheim and his associates view undervaluation, growth, and strength as providing a margin of safety—protection against permanent loss.

Wachenheim emphasizes that at Greenhaven, they are value investors not growth investors.  A growth stock investor focuses on the growth rate of a company.  If a company is growing at 15 percent a year and can maintain that rate for many years, then most of the returns for a growth stock investor will come from future growth.  Thus, a growth stock investor can pay a high P/E ratio today if growth persists long enough.

Wachenheim disagrees with growth investing as a strategy:

…I have a problem with growth-stock investing.  Companies tend not to grow at high rates forever.  Businesses change with time.  Markets mature.  Competition can increase.  Good managements can retire and be replaced with poor ones.  Indeed, the market is littered with once highly profitable growth stocks that have become less profitable cyclic stocks as a result of losing their competitive edge.  Kodak is one example.  Xerox is another.  IBM is a third.  And there are hundreds of others.  When growth stocks permanently falter, the price of their shares can fall sharply as their P/E ratios contract and, sometimes, as their earnings fall—and investors in the shares can suffer serious permanent loss.

Many investors claim that they will be able to sell before a growth stock seriously declines.  But very often it’s difficult to determine whether a company is suffering from a temporary or permanent decline.

Wachenheim observes that he’s known many highly intelligent investors—who have similar experiences to him and sensible strategies—but who, nonetheless, haven’t been able to generate results much in excess of the S&P 500 Index.  Wachenheim says that a key point of his book is that there are three behavioral attributes that a successful investor needs:

In particular, I believe that a successful investor must be adept at making contrarian decisions that are counter to the conventional wisdom, must be confident enough to reach conclusions based on probabilistic future developments as opposed to extrapolations of recent trends, and must be able to control his emotions during periods of stress and difficulties.  These three behavioral attributes are so important that they merit further analysis.



(Photo by Marijus Auruskevicius)

Most investors are not contrarians because they nearly always follow the crowd:

Because at any one time the price of a stock is determined by the opinion of the majority of investors, a stock that appears undervalued to us appears appropriately valued to most other investors.  Therefore, by taking the position that the stock is undervalued, we are taking a contrarian position—a position that is unpopular and often is very lonely.  Our experience is that while many investors claim they are contrarians, in practice most find it difficult to buck the conventional wisdom and invest counter to the prevailing opinions and sentiments of other investors, Wall Street analysts, and the media.  Most individuals and most investors simply end up being followers, not leaders.

In fact, I believe that the inability of most individuals to invest counter to prevailing sentiments is habitual and, most likely, a genetic trait.  I cannot prove this scientifically, but I have witnessed many intelligent and experienced investors who shunned undervalued stocks that were under clouds, favored fully valued stocks that were in vogue, and repeated this pattern year after year even though it must have become apparent to them that the pattern led to mediocre results at best.

Wachenheim mentions a fellow investor he knows—Danny.  He notes that Danny has a high IQ, attended an Ivy League university, and has 40 years of experience in the investment business.  Wachenheim often describes to Danny a particular stock that is depressed for reasons that are likely temporary.  Danny will express his agreement, but he never ends up buying before the problem is fixed.

In follow-up conversations, Danny frequently states that he’s waiting for the uncertainty to be resolved.  Value investor Seth Klarman explains why it’s usually better to invest before the uncertainty is resolved:

Most investors strive fruitlessly for certainty and precision, avoiding situations in which information is difficult to obtain.  Yet high uncertainty is frequently accompanied by low prices.  By the time the uncertainty is resolved, prices are likely to have risen.  Investors frequently benefit from making investment decisions with less than perfect knowledge and are well rewarded for bearing the risk of uncertainty.  The time other investors spend delving into the last unanswered detail may cost them the chance to buy in at prices so low that they offer a margin of safety despite the incomplete information.



(Image by Alain Lacroix)

Many (if not most) investors tend to extrapolate recent trends into the future.  This usually leads to underperforming the market.  See:

The successful investor, by contrast, is a contrarian who can reasonably estimate future scenarios and their probabilities of occurrence:

Investment decisions seldom are clear.  The information an investor receives about the fundamentals of a company usually is incomplete and often is conflicting.  Every company has present or potential problems as well as present or future strengths.  One cannot be sure about the future demand for a company’s products or services, about the success of any new products or services introduced by competitors, about future inflationary cost increases, or about dozens of other relevant variables.  So investment outcomes are uncertain.  However, when making decisions, an investor often can assess the probabilities of certain outcomes occurring and then make his decisions based on the probabilities.  Investing is probabilistic.

Because investing is probabilitistic, mistakes are unavoidable.  A good value investor typically will have at least 33% of his or her ideas not work, whether due to an error, bad luck, or an unforeseeable event.  You have to maintain equanimity despite inevitable mistakes:

If I carefully analyze a security and if my analysis is based on sufficiently large quantities of accurate information, I always will be making a correct decision.  Granted, the outcome of the decision might not be as I had wanted, but I know that decisions always are probabilistic and that subsequent unpredictable changes or events can alter outcomes.  Thus, I do my best to make decisions that make sense given everything I know, and I do not worry about the outcomes.  An analogy might be my putting game in golf.  Before putting, I carefully try to assess the contours and speed of the green.  I take a few practice strokes.  I aim the putter to the desired line.  I then putt and hope for the best.  Sometimes the ball goes in the hole…



(Photo by Jacek Dudzinski)


I have observed that when the stock market or an individual stock is weak, there is a tendency for many investors to have an emotional response to the poor performance and to lose perspective and patience.  The loss of perspective and patience often is reinforced by negative reports from Wall Street and from the media, who tend to overemphasize the significance of the cause of the weakness.  We have an expression that aiplanes take off and land every day by the tens of thousands, but the only ones you read about in the newspapers are the ones that crash.  Bad news sells.  To the extent that negative news triggers further selling pressures on stocks and further emotional responses, the negativism tends to feed on itself.  Surrounded by negative news, investors tend to make irrational and expensive decisions that are based more on emotions than on fundamentals. This leads to the frequent sale of stocks when the news is bad and vice versa.  Of course, the investor usually sells stocks after they already have materially decreased in price.  Thus, trading the market based on emotional reactions to short-term news usually is expensive—and sometimes very expensive.

Wachenheim agrees with Seth Klarman that, to a large extent, many investors simply cannot help making emotional investment decisions.  It’s part of human nature.  People overreact to recent news.

I have continually seen intelligent and experienced investors repeatedly lose control of their emotions and repeatedly make ill-advised decisions during periods of stress.

That said, it’s possible (for some, at least) to learn to control your emotions.  Whenever there is news, you can learn to step back and look at your investment thesis.  Usually the investment thesis remains intact.



(IBM Watson by Clockready, Wikimedia Commons)

When Greenhaven purchases a stock, it focuses on what the company will be worth in two or three years.  The market is more inefficient over that time frame due to the shorter term focus of many investors.

In 1993, Wachenheim estimated that IBM would earn $1.65 in 1995.  Any estimate of earnings two or three years out is just a best guess based on incomplete information:

…having projections to work with was better than not having any projections at all, and my experience is that a surprisingly large percentage of our earnings and valuation projections eventually are achieved, although often we are far off on the timing.

The positive development Wachenheim expected was that IBM would announce a concrete plan to significantly reduce its costs.  On July 28, 1993, the CEO Lou Gerstner announced such a plan.  When IBM’s shares moved up from $11½ to $16, Wachenheim sold his firm’s shares since he thought the market price was now incorporating the expected positive development.

Selling IBM at $16 was a big mistake based on subsequent developments.  The company generated large amounts of cash, part of which it used to buy back shares.  By 1996, IBM was on track to earn $2.50 per share.  So Wachenheim decided to repurchase shares in IBM at $24½.  Although he was wrong to sell at $16, he was right to see his error and rebuy at $24½.  When IBM ended up doing better than expected, the shares moved to $48 in late 1997, at which point Wachenheim sold.

Over the years, I have learned that we can do well in the stock market if we do enough things right and if we avoid large permanent losses, but that it is impossible to do nearly everything right.  To err is human—and I make plenty of errors.  My judgment to sell IBM’s shares in 1993 at $16 was an expensive mistake.  I try not to fret over mistakes.  If I did fret, the investment process would be less enjoyable and more stressful.  In my opinion, investors do best when they are relaxed and are having fun.

Finding good ideas takes time.  Greenhaven rejects the vast majority of its potential ideas.  Good ideas are rare.



(Photo of a bakery by Mohylek, Wikimedia Commons)

Wachenheim discovered that Howard Berkowitz bought 12 percent of the outstanding shares of Interstate Bakeries, became chairman of the board, and named a new CEO.  Wachenheim believed that Howard Berkowitz was an experienced and astute investor.  In 1967, Berkowitz was a founding partner of Steinhardt, Fine, Berkowitz & Co., one of the earliest and most successful hedge funds.  Wachenheim started analyzing Interstate in 1985 when the stock was at about $15:

Because of my keen desire to survive by minimizing risks of permanent loss, the balance sheet then becomes a good place to start efforts to understand a company.  When studying a balance sheet, I look for signs of financial and accounting strengths.  Debt-to-equity ratios, liquidity, depreciation rates, accounting practices, pension and health care liabilities, and ‘hidden’ assets and liabilities all are among common considerations, with their relative importance depending on the situation.  If I find fault with a company’s balance sheet, especially with the level of debt relative to the assets or cash flows, I will abort our analysis, unless there is a compelling reason to do otherwise.  

Wachenheim looks at management after he is done analyzing the balance sheet.  He admits that he is humble about his ability to assess management.  Also, good or bad results are sometimes due in part to chance.

Next Wachenheim examines the business fundamentals:

We try to understand the key forces at work, including (but not limited to) quality of products and services, reputation, competition and protection from future competition, technological and other possible changes, cost structure, growth opportunities, pricing power, dependence on the economy, degree of governmental regulation, capital intensity, and return on capital.  Because we believe that information reduces uncertainty, we try to gather as much information as possible.  We read and think—and we sometimes speak to customers, competitors, and suppliers.  While we do interview the managements of the companies we analyze, we are wary that their opinions and projections will be biased.

Wachenheim reveals that the actual process of analyzing a company is far messier than you might think based on the above descriptions:

We constantly are faced with incomplete information, conflicting information, negatives that have to be weighed against positives, and important variables (such as technological change or economic growth) that are difficult to assess and predict.  While some of our analysis is quantitative (such as a company’s debt-to-equity ratio or a product’s share of market), much of it is judgmental.  And we need to decide when to cease our analysis and make decisions.  In addition, we constantly need to be open to new information that may cause us to alter previous opinions or decisions.

Wachenheim indicates a couple of lessons learned.  First, it can often pay off when you follow a capable and highly incentivized business person into a situation.  Wachenheim made his bet on Interstate based on his confidence in Howard Berkowitz.  Interstate’s shares were not particularly cheap.

Years later, Interstate went bankrupt because they took on too much debt.  This is a very important lesson.  For any business, there will be problems.  Working through difficulties often takes much longer than expected.  Thus, having low or no debt is essential.



(Photo by Dwight Burdette, Wikimedia Commons)

Wachenheim describes his use of screens:

I frequently use Bloomberg’s data banks to run screens.  I screen for companies that are selling for low price-to-earnings (PE) ratios, low prices to revenues, low price-to-book values, or low prices relative to other relevant metrics.  Usually the screens produce a number of stocks that merit additional analyses, but almost always the additional analyses conclude that there are valid reasons for the apparent undervaluations. 

Wachenheim came across U.S. Home in mid-1994 based on a discount to book value screen.  The shares appeared cheap at 0.63 times book and 6.8 times earnings:

Very low multiples of book and earnings are adrenaline flows for value investors.  I eagerly decided to investigate further.

Later, although U.S. Home was cheap and produced good earnings, the stock price remained depressed.  But there was a bright side because U.S. Home led to another homebuilder idea…



(Photo by Steven Pavlov, Wikimedia Commons)

After doing research and constructing a financial model of Centex Corporation, Wachenheim had a startling realization:  the shares would be worth about $63 a few years in the future, and the current price was $12.  Finally, a good investment idea:

…my research efforts usually are tedious and frustrating.  I have hundreds of thoughts and I study hundreds of companies, but good investment ideas are few and far between.  Maybe only 1 percent or so of the companies we study ends up being part of our portfolios—making it much harder for a stock to enter our portfolio than for a student to enter Harvard.  However, when I do find an exciting idea, excitement fills the air—a blaze of light that more than compensates for the hours and hours of tedium and frustration.

Greenhaven typically aims for 30 percent annual returns on each investment:

Because we make mistakes, to achieve 15 to 20 percent average returns, we usually do not purchase a security unless we believe that it has the potential to provide a 30 percent or so annual return.  Thus, we have very high expectations for each investment.

In late 2005, Wachenheim grew concerned that home prices had gotten very high and might decline.  Many experts, including Ben Bernanke, argued that because home prices had never declined in U.S. history, they were unlikely to decline.  Wachenheim disagreed:

It is dangerous to project past trends into the future.  It is akin to steering a car by looking through the rearview mirror…



(Photo by Slambo, Wikimedia Commons)

After World War II, the construction of the interstate highway system gave trucks a competitive advantage over railroads for many types of cargo.  Furthermore, fewer passengers took trains, partly due to the interstate highway system and partly due to the commercialization of the jet airplane.  Excessive regulation of the railroadsin an effort to help farmersalso caused problems.  In the 1960s and 1970s, many railroads went bankrupt.  Finally, the government realized something had to be done and it passed the Staggers Act in 1980, deregulating the railroads:

The Staggers Act was a breath of fresh air.  Railroads immediately started adjusting their rates to make economic sense.  Unprofitable routes were dropped.  With increased profits and with confidence in their future, railroads started spending more to modernize.  New locomotives, freight cars, tracks, automated control systems, and computers reduced costs and increased reliability.  The efficiencies allowed the railroads to reduce their rates and become more competitive with trucks and barges….

In the 1980s and 1990s, the railroad industry also enjoyed increased efficiencies through consolidating mergers.  In the west, the Burlington Northern merged with the Santa Fe, and the Union Pacific merged with the Southern Pacific.  

Union Pacific reduced costs during the 2001-2002 recession, but later this led to congestion on many of its routes and to the need to hire and train new employees once the economy had picked up again.  Union Pacific experienced an earnings shortfall, leading the shares to decline to $14.86.

Wachenheim thought that Union Pacific’s problems were temporary, and that the company would earn about $1.55 in 2006.  With a conservative multiple of 14 times earnings, the shares would be worth over $22 in 2006.  Also, the company was paying a $0.30 annual dividend.  So the total return over a two-year period from buying the shares at $14½ would be 55 percent.

Wachenheim also thought Union Pacific stock had good downside protection because the book value was $12 a share.

Furthermore, even if Union Pacific stock just matched the expected return from the S&P 500 Index of 9½ percent a year, that would still be much better than cash.

The fact that the S&P 500 Index increases about 9½ percent a year is an important reason why shorting stocks is generally a bad business.  To do better than the market, the short seller has to find stocks that underperform the market by 19 percent a year.  Also, short sellers have limited potential gains and unlimited potential losses.  On the whole, shorting stocks is a terrible business and often even the smartest short sellers struggle.

Greenhaven sold its shares in Union Pacific at $31 in mid-2007, since other investors had recognized the stock’s value.  Including dividends, Greenhaven earned close to a 24 percent annualized return.

Wachenheim asks why most stock analysts are not good investors.  For one, most analysts specialize in one industry or in a few industries.  Moreover, analysts tend to extrapolate known information, rather than define future scenarios and their probabilities of occurrence:

…in my opinion, most individuals, including securities analysts, feel more comfortable projecting current fundamentals into the future than projecting changes that will occur in the future.  Current fundamentals are based on known information.  Future fundamentals are based on unknowns.  Predicting the future from unknowns requires the efforts of thinking, assigning probabilities, and sticking one’s neck out—all efforts that human beings too often prefer to avoid.

Also, I believe it is difficult for securities analysts to embrace companies and industries that currently are suffering from poor results and impaired reputations.  Often, securities analysts want to see tangible proof of better results before recommending a stock.  My philosophy is that life is not about waiting for the storm to pass.  It is about dancing in the rain.  One usually can read a weather map and reasonably project when a storm will pass.  If one waits for the moment when the sun breaks out, there is a high probability others already will have reacted to the improved prospects and already will have driven up the price of the stock—and thus the opportunity to earn large profits will have been missed.

Wachenheim then quotes from a New York Times op-ed piece written on October 17, 2008, by Warren Buffett:

A simple rule dictates my buying:  Be fearful when others are greedy, and be greedy when others are fearful.  And most certainly, fear is now widespread, gripping even seasoned investors.  To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions.  But fears regarding the long-term prosperity of the nation’s many sound companies make no sense.  These businesses will indeed suffer earnings hiccups, as they always have.  But most major companies will be setting new profit records 5, 10, and 20 years from now.  Let me be clear on one point:  I can’t predict the short-term movements of the stock market.  I haven’t the faintest idea as to whether stocks will be higher or lower a month—or a year—from now.  What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up.  So if you wait for the robins, spring will be over.



(AIG Corporate, Photo by AIG, Wikimedia Commons)

Wachenheim is forthright in discussing Greenhaven’s investment in AIG, which turned out to be a huge mistake.  In late 2005, Wachenheim estimated that the intrinsic value of AIG would be about $105 per share in 2008, nearly twice the current price of $55.  Wachenheim also liked the first-class reputation of the company, so he bought shares.

In late April 2007, AIG’s shares had fallen materially below Greenhaven’s cost basis:

When shares of one of our holdings are weak, we usually revisit the company’s longer-term fundamentals.  If the longer-term fundamentals have not changed, we normally will continue to hold the shares, if not purchase more.  In the case of AIG, it appeared to us that the longer-term fundamentals remained intact.

When Lehman filed for Chapter 11 bankruptcy protection on September 15, 2008, all hell broke loose:

The decline in asset values caused financial institutions to mark down the carrying value of their assets, which, in turn, caused sharp reductions in their credit ratings.  Sharp reductions in credit ratings required financial institutions to raise capital and, in the case of AIG, to post collateral on its derivative contracts.  But the near freezing of the financial markets prevented the requisite raising of capital and cash and thus caused a further deterioration in creditworthiness, which further increased the need for new capital and cash, and so on… On Tuesday night, September 16, the U.S. government agreed to provide the requisite cash in return for a lion’s share of the ownership of AIG.  As soon as I read the agreement, it was clear to me that we had a large permanent loss in our holdings of AIG.

Wachenheim defends the U.S. government bailouts.  Much of the problem was liquidity, not solvency.  Also, the bailouts helped restore confidence in the financial system.

Wachenheim asked himself if he would make the same decision today to invest in AIG:

My answer was ‘yes’—and my conclusion was that, in the investment business, relatively unpredictable outlier developments sometimes can quickly derail otherwise attractive investments.  It comes with the territory.  So while we work hard to reduce the risks of large permanent loss, we cannot completely eliminate large risks.  However, we can draw a line on how much risk we are willing to accept—a line that provides sufficient apparent protection and yet prevents us from being so risk averse that we turn down too many attractive opportunities.  One should not invest with the precept that the next 100-year storm is around the corner.

Wachenheim also points out that when Greenhaven learns of a flaw in its investment thesis, usually the firm is able to exit the position with only a modest loss.  If you’re right 2/3 of the time and if you limit losses as much as possible, the results should be good over time.



(Photo by Miosotis Jade, Wikimedia Commons)

In 2011, Wachenheim carefully analyzed the housing market and reached an interesting conclusion:

I was excited that we had a concept about a probable strong upturn in the housing market that was not shared by most others.  I believed that the existing negativism about housing was due to the proclivity of human beings to uncritically project recent trends into the future and to overly dwell on existing problems.  When analyzing companies and industries, I tend to be an optimist by nature and a pragmatist through effort.  In terms of the proverbial glass of water, it is never half empty, but always half full—and, as a pragmatist, it is twice as large as it needs to be.

Next Wachenheim built a model to estimate normalized earnings for Lowe’s three years in the future (in 2014).  He came up with normal earnings of $3 per share.  He thought the appropriate price-to-earnings ratio was 16.  So the stock would be worth $48 in 2014 versus its current price (in 2011) of $24.  It looked like a bargain.

After gathering more information, Wachenheim revised his earnings model:

…I revise models frequently because my initial models rarely are close to being accurate.  Usually, they are no better than directional.  But they usually do lead me in the right direction, and, importantly, the process of constructing a model forces me to consider and weigh the central fundamentals of a company that will determine the company’s future value.

Wachenheim now thought that Lowe’s could earn close to $4.10 in 2015, which would make the shares worth even more than $48.  In August 2013, the shares hit $45.

In late September 2013, after playing tennis, another money manager asked Wachenheim if he was worried that the stock market might decline sharply if the budget impasse in Congress led to a government shutdown:

I answered that I had no idea what the stock market would do in the near term.  I virtually never do.  I strongly believe in Warren Buffett’s dictum that he never has an opinion on the stock market because, if he did, it would not be any good, and it might interfere with opinions that are good.  I have monitored the short-term market predictions of many intelligent and knowledgeable investors and have found that they were correct about half the time.  Thus, one would do just as well by flipping a coin.

I feel the same way about predicting the short-term direction of the economy, interest rates, commodities, or currencies.  There are too many variables that need to be identified and weighed.

As for Lowe’s, the stock hit $67.50 at the end of 2014, up 160 percent from what Greenhaven paid.



(Photo by Steven Pavlov, Wikimedia Commons)

Wachenheim does not believe in the Efficient Market Hypothesis:

It seems to me that the boom-bust of growth stocks in 1968-1974 and the subsequent boom-bust of Internet technology stocks in 1998-2002 serve to disprove the efficient market hypothesis, which states that it is impossible for an investor to beat the stock market because stocks always are efficiently priced based on all the relevant and known information on the fundamentals of the stocks.  I believe that the efficient market hypothesis fails because it ignores human nature, particularly the nature of most individuals to be followers, not leaders.  As followers, humans are prone to embrace that which already has been faring well and to shun that which recently has been faring poorly.  Of course, the act of buying into what already is doing well and shunning what is doing poorly serves to perpetuate a trend.  Other trend followers then uncritically join the trend, causing the trend to feed on itself and causing excesses.

Many investors focus on the shorter term, which generally harms their long-term performance:

…so many investors are too focused on short-term fundamentals and investment returns at the expense of longer-term fundamentals and returns.  Hunter-gatherers needed to be greatly concerned about their immediate survival—about a pride of lions that might be lurking behind the next rock… They did not have the luxury of thinking about longer-term planning… Then and today, humans often flinch when they come upon a sudden apparent danger—and, by definition, a flinch is instinctive as opposed to cognitive.  Thus, over years, the selection process resulted in a subconscious proclivity for humans to be more concerned about the short term than the longer term.

By far the best thing for long-term investors is to do is absolutely nothing.  The investors who end up performing the best over the course of several decades are nearly always those investors who did virtually nothing.  They almost never checked prices.  They never reacted to bad news.

Regarding Whirlpool:

In the spring of 2011, Greenhaven studied Whirlpool’s fundamentals.  We immediately were impressed by management’s ability and willingness to slash costs.  In spite of a materially subnormal demand for appliances in 2010, the company was able to earn operating margins of 5.9 percent.  Often, when a company is suffering from particularly adverse industry conditions, it is unable to earn any profit at all.  But Whirlpool remained moderately profitable.  If the company could earn 5.9 percent margins under adverse circumstances, what could the company earn once the U.S. housing market and the appliance market returned to normal?

Not surprisingly, Wall Street analysts were focused on the short term:

…A report by J. P. Morgan dated April 27, 2011, stated that Whirlpool’s current share price properly reflected the company’s increased costs for raw materials, the company’s inability to increase its prices, and the current soft demand for appliances…

The J. P. Morgan report might have been correct about the near-term outlook for Whirlpool and its shares.  But Greenhaven invests with a two- to four-year time horizon and cares little about the near-term outlook for its holdings.

The bulk of Greenhaven’s returns has been generated by relatively few of its holdings:

If one in five of our holdings triples in value over a three-year period, then the other four holdings only have to achieve 12 percent average annual returns in order for our entire portfolio to achieve its stretch goal of 20 percent.  For this reason, Greenhaven works extra hard trying to identify potential multibaggers.  Whirlpool had the potential to be a multibagger because it was selling at a particularly low multiple of its potential earnings power.  Of course, most of our potential multibaggers do not turn out to be multibaggers.  But one cannot hit a multibagger unless one tries, and sometimes our holdings that initially appear to be less exciting eventually benefit from positive unforeseen events (handsome black swans) and unexpectedly turn out to be a complete winner.  For this reason, we like to remain fully invested as long as our holdings remain reasonably priced and free from large risks of permanent loss.



(Photo by José A. Montes, Wikimedia Commons)

Wachenheim likes to read about the history of each company that he studies.

On July 4, 1914, a flight took place in Seattle, Washington, that had a major effect on the history of aviation.  On that day, a barnstormer named Terah Maroney was hired to perform a flying demonstration as part of Seattle’s Independence Day celebrations.  After displaying aerobatics in his Curtis floatplane, Maroney landed and offered to give free rides to spectators.  One spectator, William Edward Boeing, a wealthy owner of a lumber company, quickly accepted Maroney’s offer.  Boeing was so exhilarated by the flight that he completely caught the aviation bug—a bug that was to be with him for the rest of his life.

Boeing launched Pacific Aero Products (renamed the Boeing Airplane Company in 1917).  In late 1916, Boeing designed an improved floatplane, the Model C.  The Model C was ready by April 1917, the same month the United States entered the war.  Boeing thought the Navy might need training aircraft.  The Navy bought two.  They performed well, so the Navy ordered 50 more.

Boeing’s business naturally slowed down after the war.  Boeing sold a couple of small floatplanes (B-1’s), then 13 more after Charles Lindberg’s 1927 transatlantic flight.  Still, sales of commercial planes were virtually nonexistent until 1933, when the company started marketing its model 247.

The twin-engine 247 was revolutionary and generally is recognized as the world’s first modern airplane.  It had a capacity to carry 10 passengers and a crew of 3.  It had a cruising speed of 189 mph and could fly about 745 miles before needing to be refueled.

Boeing sold seventy-five 247’s before making the much larger 307 Stratoliner, which would have sold well were it not for the start of World War II.

Boeing helped the Allies defeat Germany.  The Boeing B-17 Flying Fortress bomber and the B-29 Superfortress bomber became legendary.  More than 12,500 B-17s and more than 3,500 B-29s were built (some by Boeing itself and some by other companies that had spare capacity).

Boeing prospered during the war, but business slowed down again after the war.  In mid-1949, the de Havilland Aircraft Company started testing its Comet jetliner, the first use of a jet engine.  The Comet started carrying passengers in 1952.  In response, Boeing started developing its 707 jet.  Commercial flights for the 707 began in 1958.

The 707 was a hit and soon became the leading commercial plane in the world.

Over the next 30 years, Boeing grew into a large and highly successful company.  It introduced many models of popular commercial planes that covered a wide range of capacities, and it became a leader in the production of high-technology military aircraft and systems.  Moreover, in 1996 and 1997, the company materially increased its size and capabilities by acquiring North American Aviation and McDonnell Douglas.

In late 2012, after several years of delays on its new, more fuel-efficient plane—the 787—Wall Street and the media were highly critical of Boeing.  Wachenheim thought that the company could earn at least $7 per share in 2015.  The stock in late 2012 was at $75, or 11 times the $7.  Wachenheim believed that this was way too low for such a strong company.

Wachenheim estimated that two-thirds of Boeing’s business in 2015 would come from commercial aviation.  He figured that this was an excellent business worth 20 times earnings (he used 19 times to be conservative).  He reckoned that defense, one-third of Boeing’s business, was worth 15 times earnings.  Therefore, Wachenheim used 17.7 as the multiple for the whole company, which meant that Boeing would be worth $145 by 2015.

Greenhaven established a position in Boeing at about $75 a share in late 2012 and early 2013.  By the end of 2013, Boeing was at $136.  Because Wall Street now had confidence that the 787 would be a commercial success and that Boeing’s earnings would rise, Wachenheim and his associates concluded that most of the company’s intermediate-term potential was now reflected in the stock price.  So Greenhaven started selling its position.



(Photo by Eddie Maloney, Wikimedia Commons)

The airline industry has had terrible fundamentals for a long time.  But Wachenheim was able to be open-minded when, in August 2012, one of his fellow analysts suggested Southwest Airlines as a possible investment.  Over the years, Southwest had developed a low-cost strategy that gave the company a clear competitive advantage.

Greenhaven determined that the stock of Southwest was undervalued, so they took a position.

The price of Southwest’s shares started appreciating sharply soon after we started establishing our position.  Sometimes it takes years before one of our holdings starts to appreciate sharply—and sometimes we are lucky with our timing.

After the shares tripled, Greenhaven sold half its holdings since the expected return from that point forward was not great.  Also, other investors now recognized the positive fundamentals Greenhaven had expected.  Greenhaven sold the rest of its position as the shares continued to increase.



(Photo of Marcus Goldman, Wikimedia Commons)

Wachenheim echoes Warren Buffett when it comes to recognizing how much progress the United States has made:

My experience is that analysts and historians often dwell too much on a company’s recent problems and underplay its strengths, progress, and promise.  An analogy might be the progress of the United States during the twentieth century.  At the end of the century, U.S. citizens generally were far wealthier, healthier, safer, and better educated than at the start of the century.  In fact, the century was one of extraordinary progress.  Yet most history books tend to focus on the two tragic world wars, the highly unpopular Vietnam War, the Great Depression, the civil unrest during the Civil Rights movement, and the often poor leadership in Washington.  The century was littered with severe problems and mistakes.  If you only had read the newspapers and the history books, you likely would have concluded that the United States had suffered a century of relative and absolute decline.  But the United States actually exited the century strong and prosperous.  So did Goldman exit 2013 strong and prosperous.

In 2013, Wachenheim learned that Goldman had an opportunity to gain market share in investment banking because some competitors were scaling back in light of new regulations and higher capital requirements.  Moreover, Goldman had recently completed a $1.9 billion cost reduction program.  Compensation as a percentage of sales had declined significantly in the past few years.

Wachenheim discovered that Goldman is a technology company to a large extent, with a quarter of employees working in the technology division.  Furthermore, the company had strong competitive positions in its businesses, and had sold or shut down sub-par business lines.  Wachenheim checked his investment thesis with competitors and former employees.  They confirmed that Goldman is a powerhouse.

Wachenheim points out that it’s crucial for investors to avoid confirmation bias:

I believe that it is important for investors to avoid seeking out information that reinforces their original analyses.  Instead, investors must be prepared and willing to change their analyses and minds when presented with new developments that adversely alter the fundamentals of an industry or company.  Good investors should have open minds and be flexible.

Wachenheim also writes that it’s very important not to invent a new thesis when the original thesis has been invalidated:

We have a straightforward approach.  When we are wrong or when fundamentals turn against us, we readily admit we are wrong and we reverse our course.  We do not seek new theories that will justify our original decision.  We do not let errors fester and consume our attention.  We sell and move on.

Wachenheim loves his job:

I am almost always happy when working as an investment manager.  What a perfect job, spending my days studying the world, economies, industries, and companies;  thinking creatively;  interviewing CEOs of companies… How lucky I am.  How very, very lucky.



An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.


If you are interested in finding out more, please e-mail me or leave a comment.

My e-mail:




Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

One Up On Wall Street

(Image:  Zen Buddha Silence by Marilyn Barbone.)

January 30, 2022

Peter Lynch is one of the great investors.  When Lynch managed Fidelity Magellan from 1977 to 1990, the fund averaged 29.2% per year—more than doubling the annual return of the S&P 500 Index—making it the best performing mutual fund in the world.

In One Up On Wall Street: How to Use What You Already Know to Make Money in the Market (Fireside, 1989 and 2000), Lynch offers his best advice to individual investors.

Lynch explains how to find tenbaggers—stocks that increase by 10x—by looking among stocks that are too small for most professionals.  Lynch also suggests that you pay attention to small businesses you may come across in your daily life.  If you notice a company that seems to be doing well, then you should research its earnings prospects, financial condition, competitive position, and so forth, in order to determine if the stock is a bargain.

Moreover, Lynch notes that his biggest winners—tenbaggers, twentybaggers, and even a few hundredbaggers—typically have taken at least three to ten years to play out.

The main idea is that a stock tracks the earnings of the underlying company over time.  If you can pay a cheap price relative to earnings, and if those earnings increase over subsequent years, then you can get some fivebaggers, tenbaggers, and even better as long as you hold the stock while the story is playing out.

Lynch also writes that being right six out of ten times on average works well over time.  A few big winners will overwhelm the losses from stocks that don’t work out.

Don’t try to time the market.  Focus on finding cheap stocks.  Some cheap stocks do well even when the market is flat or down.  But over the course of many years, the economy grows and the market goes higher.  If you try to dance in and out of stocks, eventually you’ll miss big chunks of the upside.

Here are the sections in this blog post:

  • Introduction: The Advantages of Dumb Money
  • The Making of a Stockpicker
  • The Wall Street Oxymorons
  • Is This Gambling, or What?
  • Personal Qualities It Takes to Succeed
  • Is This a Good Market? Please Don’t Ask
  • Stalking the Tenbagger
  • I’ve Got It, I’ve Got It—What Is It?
  • The Perfect Stock, What a Deal!
  • Stocks I’d Avoid
  • Earnings, Earnings, Earnings
  • The Two-Minute Drill
  • Getting the Facts
  • Some Famous Numbers
  • Rechecking the Story
  • The Final Checklist
  • Designing a Portfolio
  • The Best Time to Buy and Sell



Lynch writes that two decades as a professional investor have convinced him that the ordinary individual investor can do just as well as—if not better than—than the average Wall Street expert.

Dumb money is only dumb when it listens to the smart money.

Lynch makes it clear that if you’ve already invested in a mutual fund with good long-term performance, then sticking with it makes sense.  His point is that if you’ve decided to invest in stocks directly, then it’s possible to do as well as—if not better than—the average professional investor.  This means ignoring hot tips and doing your own research on companies.

There are at least three good reasons to ignore what Peter Lynch is buying:  (1) he might be wrong!  (A long list of losers from my own portfolio constantly reminds me that the so-called smart money is exceedingly dumb about 40 percent of the time);  (2) even if he’s right, you’ll never know when he’s changed his mind about a stock and sold;  and (3) you’ve got better sources, and they’re all around you…

If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them… and if you work in the industry, so much the better.  This is where you’ll find the tenbaggers.  I’ve seen it happen again and again from my perch at Fidelity.

You can find tenbaggers even in weak markets, writes Lynch.  If you have ten positions at 10% each, then one tenbagger will cause your total portfolio to increase 90% if the other nine positions are flat.  If the other nine positions collectively lose 50% (perhaps in weak market), then your overall portfolio will still be up 45% if you have one tenbagger.

Most often, tenbaggers are in companies like Dunkin’ Donuts rather than in penny stocks that depend on a scientific breakthrough.  Lynch also mentions La Quinta Motor Inns—a tenbagger from 1973 to 1983.  (La Quinta modeled itself on Holiday Inn, but with 30% lower costs and 30% lower prices.  If you’ve attended a Berkshire Hathaway Annual Shareholders meeting in the past decade, you may have stayed at La Quinta along with a bunch of other frugal Berkshire shareholders.)

  • Note: When considering examples Lynch gives in his book, keep in mind that he first wrote the book in 1989.  The examples are from that time period.

Lynch says he came across many of his best investment ideas while he was out and about:

Taco Bell, I was impressed with the burrito on a trip to California;  La Quinta Motor Inns, somebody at the rival Holiday Inn told me about it;  Volvo, my family and friends drive this car;  Apple Computer, my kids had one at home and then the systems manager bought several for the office;  Service Corporation International, a Fidelity electronics analyst… found on a trip to Texas;  Dunkin’ Donuts, I loved the coffee…

Many individual investors think the big winners must be technology companies, but very often that’s not the case:

Among amateur investors, for some reason it’s not considered sophisticated practice to equate driving around town eating donuts with the initial phase of an investigation into equities.  People seem more comfortable investing in something about which they are entirely ignorant.  There seems to be an unwritten rule on Wall Street:  If you don’t understand it, then put your life savings into it.  Shun the enterprise around the corner, which can at least be observed, and seek out the one that manufactures an incomprehensible product.

Lynch is quick to point out that finding a promising company is only the first step.  You then must conduct the research.



Lynch describes his experience at Boston College:

As I look back on it now, it’s obvious that studying history and philosophy was much better preparation for the stock market than, say, studying statistics.  Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage.

Granted, since Lynch first wrote this book in 1989, more quantitative investors—using computer-based models—have come along.  But when it comes to picking stocks that can do well if held for many years, the majority of successful investors still follow a much more traditional process:  gathering information through observation, massive reading, and scuttlebutt, and then making investment decisions that are often partly qualitative in nature.  Here is a partial list of successful stockpickers:

  • Bill Ackman, David Abrams, Lee Ainslie, Chuck Akre, Bruce Berkowitz, Christopher Browne, Warren Buffett, Michael Burry, Leon Cooperman, Christopher Davis, David Einhorn, Jean-Marie Eveillard, Thomas Gayner, Glenn Greenberg, Joel Greenblatt, Mason Hawkins, Carl Icahn, Seth Klarman, Stephen Mandel, Charlie Munger, Bill Nygren, Mohnish Pabrai, Michael Price, Richard Pzena, Robert Rodriguez, Stephen Romick, Thomas Russo, Walter Schloss, Lou Simpson, Guy Spier, Arnold Van Den Berg, Prem Watsa, Wallace Weitz, and Donald Yacktman.



Lynch observes that professional investors are typically not able to invest in most stocks that become tenbaggers.  Perhaps the most important reason is that most professional investors never invest in microcap stocks, stocks with market caps below $500 million.  Assets under management (AUM) for many professional investors are just too large to be able to invest in microcap companies.  Moreover, even smaller funds usually focus on small caps instead of micro caps.  Often that’s a function of AUM, but sometimes it’s a function of microcap companies being viewed as inherently riskier.

There are thousands of microcap companies.  And many micro caps are good businesses with solid revenues and earnings, and with healthy balance sheets.  These are the companies you should focus on as an investor.  (There are some microcap companies without good earnings or without healthy balance sheets.  Simply avoid these.)

If you invest in a portfolio of solid microcap companies, and hold for at least 10 years, then the expected returns are far higher than would you get from a portfolio of larger companies.  There is more volatility along the way, but if you can just focus on the long-term business results, then shorter term volatility is generally irrelevant.  Real risk for value investors is not volatility, or a stock that goes down temporarily.  Real risk is the chance of suffering a permanent loss—when the whole portfolio declines and is unable to bounce back.

Fear of volatility causes many professional investors only to look at stocks that have already risen a great deal, so that they’re no longer micro caps.  You’ll miss a lot of tenbaggers and twentybaggers if you can’t even look at micro caps.  That’s a major reason why individual investors have an advantage over professional investors.  Individual investors can look at thousands of microcap companies, many of which are in very good shape.

Furthermore, even if a professional investor could look at microcap stocks, there are still strong incentives not to do so.  Lynch explains:

…between the chance of making an unusually large profit on an unknown company and the assurance of losing only a small amount on an established company, the normal mutual-fund manager, pension-fund manager, or corporate-portfolio manager would jump at the latter.  Success is one thing, but it’s more important not to look bad if you fail.

As Lynch says, if you’re a professional investor and you invest in a blue chip like General Electric which doesn’t work, clients and bosses will ask, ‘What is wrong with GE?’  But if you invest in an unknown microcap company and it doesn’t work, they’ll ask, ‘What is wrong with you?’

Lynch sums it up the advantages of the individual investor:

You don’t have to spend a quarter of your waking hours explaining to a colleague why you are buying what you are buying.  [Also, you can invest in unknown microcap companies…]  There’s nobody to chide you for buying back a stock at $19 that you earlier sold at $11—which may be a perfectly sensible move.



In general, stocks have done better than bonds over long periods of time.

Historically, investing in stocks is undeniably more profitable than investing in debt.  In fact, since 1927, common stocks have recorded gains of 9.8 percent a year on average, as compared to 5 percent for corporate bonds, 4.4 percent for government bonds, and 3.4 percent for Treasury bills.

The long-term inflation rate, as measured by the Consumer Price Index, is 3 percent a year, which gives common stocks a real return of 6.8 percent a year.  The real return on Treasury bills, known as the most conservative and sensible of all places to put money, has been nil.  That’s right.  Zippo.

Many people get scared out of stocks whenever there is a large drop of 20-40% (or more).  But both the U.S. economy and U.S. stocks are very resilient and have always bounced back quickly.  This is especially true since the Great Depression, which was a prolonged period of deep economic stagnation caused in large part by policy errors.  A large fiscal stimulus and/or a huge program of money-printing (monetary stimulus) would have significantly shortened the Great Depression.

Lynch defines good investing as a system of making bets when the odds are in your favor.  If you’re right 60% of the time and you have a good system, then you should do fine over time.  Lynch compares investing to stud poker:

You can never be certain what will happen, but each new occurrence—a jump in earnings, the sale of an unprofitable subsidiary, the expansion into new markets—is like turning up another card.  As long as the cards suggest favorable odds of success, you stay in the hand.

…Consistent winners raise their bets as their position strengthens, and they exit the game when the odds are against them…

Consistent winners also resign themselves to the fact that they’ll occasionally be dealt three aces and bet the limit, only to lose to a hidden royal flush.  They accept their fate and go on to the next hand, confident that their basic method will reward them over time.  People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences.  Calamitous drops do not scare them out of the game… They realize the stock market is not pure science, and not like chess, where the superior position always wins.  If seven out of ten of my stocks perform as expected, then I’m delighted.  If six out of ten of my stocks perform as expected, then I’m thankful.  Six out of ten is all it takes to produce on enviable record on Wall Street.

Lynch concludes the chapter by saying that investing is more like 70-card poker than 7-card poker.  If you have ten positions, it’s like playing ten 70-card hands at once.



Lynch writes:

It seems to me the list of qualities ought to include patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit mistakes, and the ability to ignore general panic…

It’s also important to be able to make decisions without complete or perfect information.  Things are almost never clear on Wall Street, or when they are, then it’s too late to profit from them.  The scientific mind that needs to know all the data will be thwarted here.

And finally, it’s crucial to be able to resist your human nature and your ‘gut feelings.’  It’s the rare investor who doesn’t secretly harbor the conviction that he or she has a knack for divining stock prices or gold prices or interest rates, in spite of the fact that most of us have been proven wrong again and again.  It’s uncanny how often people feel most strongly that stocks are going to go up or the economy is going to improve just when the opposite occurs.  This is borne out by the popular investment-advisory newsletter services, which themselves tend to turn bullish and bearish at inopportune moments.

According to information published by Investor’s Intelligence, which tracks investor sentiment via the newsletters, at the end of 1972, when stocks were about to tumble, optimism was at an all-time high, with only 15 percent of the advisors bearish.  At the beginning of the stock market rebound in 1974, investor sentiment was at an all-time low, with 65 percent of the advisors fearing the worst was yet to come…. At the start of the 1982 sendoff into a great bull market, 55 percent of the advisors were bears, and just prior to the big gulp of October 19, 1987, 80 percent of the advisors were bulls again.

…Does the success of Ravi Batra’s book The Great Depression of 1990 almost guarantee a great national prosperity?

Lynch summarizes:

…The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them.  Stand by your stocks as long as the fundamental story of the company hasn’t changed.




There’s another theory that we have recessions every five years, but it hasn’t happened that way so far… Of course, I’d love to be warned before we do go into a recession, so I could adjust my portfolio.  But the odds of my figuring it out are nil.  Some people wait for these bells to go off, to signal the end of a recession or the beginning of an exciting new bull market.  The trouble is the bells never go off.  Remember, things are never clear until it’s too late.

… No matter how we arrive at the latest financial conclusion, we always seem to be preparing ourselves for the last thing that’s happened, as opposed to what’s going to happen next.  This penultimate preparedness is our way of making up for the fact that we didn’t see the last thing coming along in the first place.

Lynch continues:

I don’t believe in predicting markets.  I believe in buying great companies—especially companies that are undervalued and/or underappreciated.

Lynch explains that the stock market itself is irrelevant.  What matters is the current and future earnings of the individual business you’re considering.  Lynch:

Several of my favorite tenbaggers made their biggest moves during bad markets.  Taco Bell soared through the last two recessions.

Focus on specific companies rather than the market as a whole.  Because you’re not restricted as an individual investor—you can look at microcap companies and you can look internationally—there are virtually always bargains somewhere.

A few good quotes from Warren Buffett on forecasting:

Market forecasters will fill your ear but never fill your wallet.

We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen.

Charlie and I never have an opinion on the market because it wouldn’t be any good and it might interfere with the opinions we have that are good.



If you work in a particular industry, this can give you an edge:

If you work in the chemical industry, then you’ll be among the first to realize that demand…is going up, prices are going up, and excess inventories are going down.  You’ll be in a position to know that no new competitors have entered the market and no new plants are under construction, and that it takes two to three years to build one.

Lynch also argues that if you’re a consumer of particular products, then you may be able to gain insight into companies that sell those products.  Again, you still need to study the financial statements in order to understand earnings and the balance sheet.  But noticing products that are doing well is a good start.



Most of the biggest moves—from tenbaggers to hundredbaggers—occur in smaller companies.  Microcap companies are the best place to look for these multi-baggers, while small-cap companies are the second best place to look.

Lynch identifies six general categories:  slow growers, stalwarts, fast growers, cyclicals, asset plays, and turnarounds.  (Slow growers and stalwarts tend to be larger companies.)

Slow Growers

Many large companies grow slowly, but are relatively dependable and may pay dividends.  A conservative investor may consider this category.


These companies tend to grow annual earnings at 10 to 12 percent a year.  If you buy the stock when it’s a bargain, you can make 30 to 50 percent, then sell and repeat the process.  This is Lynch’s approach to Stalwarts.  Also, Stalwarts can offer decent protection during weak markets.

Fast Growers

Some small, aggressive new companies can grow at 20 to 25 percent a year:

If you choose wisely, this is the land of the 10- to 40-baggers, and even the 200-baggers.

Of course, you have to be careful to identify the risks.  Many younger companies may grow too quickly or be underfinanced.  So look for the fast growers with good balance sheets and good underlying profitability.


A cyclical is a company whose sales and profits rise and fall regularly.  If you can buy when the company and the industry are out of favor—near the bottom of the cycle—then you can do well with a cyclical.  (You also need to sell when the company and the industry are doing well again unless you think it’s a good enough company to hold for a decade or longer.)

Some cyclical stocks—like oil stocks—tend to have a low level of correlation with the broader stock market.  This can help a portfolio, especially when the broader stock market offers few bargains.



Turnaround stocks make up lost ground very quickly… The best thing about investing in successful turnarounds is that of all the categories of stocks, their ups and downs are least related to the general market.

Again, a low correlation with the broader market is especially an advantage when the broader market is overvalued.  You do have to be careful with turnarounds, though.  As Buffett has said, ‘Turnarounds seldom turn.’

Asset Plays

A company may have something valuable that the market has overlooked.  It may be as simple as a pile of cash.  Sometimes it’s real estate.  It may be unrecognized intellectual property.  Or it could be resources in the ground.



Similar to Warren Buffett, Lynch prefers simple businesses:

Getting the story on a company is a lot easier if you understand the basic business.  That’s why I’d rather invest in panty hose than in communications satellites, or in motel chains than in fiber optics.  The simpler it is, the better I like it.  When somebody says, ‘Any idiot could run this joint,’ that’s a plus as far as I’m concerned, because sooner or later any idiot probably is going to be running it.

… For one thing, it’s easier to follow.  During a lifetime of eating donuts or buying tires, I’ve developed a feel for the product line that I’ll never have with laser beams or microprocessors.

Lynch then names thirteen attributes that are important to look for:

It Sounds Dull—Or, Even Better, Ridiculous

Lynch says a boring name is a plus, because that helps a company to stay neglected and overlooked, often causing the stock to be cheap.  Bob Evans Farms is an example of a perfect name.

It Does Something Dull

Crown, Cork, and Seal makes cans and bottle caps, says Lynch.  The more boring the business, the better.  Again, this will help keep the stock neglected, often causing the stock to be cheap.

It Does Something Disagreeable

Safety-Kleen provides gas stations with a machine that washes greasy auto parts.  Gas stations love it.  But it’s a bit disgusting, which can cause the stock to be neglected and thus possibly cheap.

It’s a Spinoff

Large companies tend to make sure that divisions they spin off are in good shape.  Generally spinoffs are neglected by most professional investors, often because the market cap of the spinoff is too small for them to consider.

The Institutions Don’t Own It, and the Analysts Don’t Follow It

With no institutional ownership, the stock may be neglected and possibly cheap.  With no analyst coverage, the chance of neglect and cheapness is even higher.  It’s not only microcap companies that are neglected.  When popular stocks fall deeply out of favor, they, too, can become neglected.

Rumors Abound: It’s Involved with Toxic Waste

Waste Management, Inc. was a hundredbagger.  People are so disturbed by sewage and waste that they tend to neglect such stocks.

There’s Something Depressing About It

Funeral home companies tend to be neglected and the stocks can get very cheap at times.

It’s a No-Growth Industry

In a no-growth industry, there’s much less competition.  This gives companies in the industry room to grow.

It’s Got a Niche

The local rock pit has a niche.  Lynch writes that if you have the only rock pit in Brooklyn, you have a virtual monopoly.  A rival two towns away is not going to transport rocks into your territory because the mixed rocks only sell for $3 a ton.

People Have to Keep Buying It

Drugs, soft drinks, razor blades, etc., are products that people need to keep buying.

It’s a User of Technology

A company may be in a position to benefit from ongoing technological improvements.

The Insiders Are Buyers

Insider buying usually means the insiders think the stock is cheap.

Also, you want insiders to own as much stock as possible so that they are incentivized to maximize shareholder value over time.  If executive salaries are large compared to stock ownership, then executives will focus on growth instead of on maximizing shareholder value (i.e., profitability).

The Company Is Buying Back Shares

If the shares are cheap, then the company can create much value through buybacks.



Lynch advises avoiding the hottest stock in the hottest industry.  Usually a stock like that will be trading at an extremely high valuation, which requires a great deal of future growth for the investor just to break even.  When future growth is not able to meet lofty expectations, typically the stock will plummet.

Similarly, avoid the next something.  If a stock is touted as the next IBM, the next Intel, or the next Disney, avoid it because very probably it will not be the next thing.

Avoid diworseifications:  Avoid the stock of companies that are making foolish acquisitions of businesses in totally different industries.  Such diworseifications rarely work out for shareholders.  Two-thirds of all acquisitions do not create value.  This is even more true when acquisitions are diworseifications.

Beware whisper stocks, which are often technological long shots or whiz-bang stories such as miracle drugs.  Lynch notes that he’s lost money on every single whisper stock he’s ever bought.

One trick to avoiding whisper stocks is to wait until they have earnings.  You can still get plenty of tenbaggers from companies that have already proven themselves.  Buying long shots before they have earnings rarely works.  This is a good rule for buying microcap stocks in general:  Wait until the company has solid earnings and a healthy balance sheet.



Lynch writes that a stock eventually will track the earnings of the business:

Analyzing a company’s stock on the basis of earnings and assets is no different from analyzing a local Laundromat, drugstore, or apartment building that you might want to buy.  Although it’s easy to forget sometimes, a share of stock is not a lottery ticket.  It’s part ownership of a business.

Lynch gives an example:

And how about Masco Corporation, which developed the single-handle ball faucet, and as a result enjoyed thirty consecutive years of up earnings through war and peace, inflation and recession, with the earnings rising 800-fold and the stock rising 1,300-fold between 1958 and 1987?  What would you expect from a company that started out with the wonderfully ridiculous name of Masco Screw Products?

Lynch advises not to invest in companies with high price-to-earnings (p/e) ratios:

If you remember nothing else about p/e ratios, remember to avoid stocks with excessively high ones.  You’ll save yourself a lot of grief and a lot of money if you do.  With few exceptions, an extremely high p/e ratio is a handicap to a stock, in the same way that extra weight in the saddle is a handicap to a racehorse.

Future earnings may not be predictable, but you can at least check how the company plans to increase future earnings.  Lynch:

There are five basic ways a company can increase earnings:  reduce costs;  raise prices;  expand into new markets;  sell more of its product in the old markets;  or revitalize, close, or otherwise dispose of a losing operation.  These are the factors to investigate as you develop the story.  If you have an edge, this is where it’s going to be most helpful.



Warren Buffett has said that he would have been a journalist if he were not an investor.  Buffett says his job as an investor is to write the story for the company in question.  Lynch has a similar view.  He explains:

Before buying a stock, I like to be able to give a two-minute monologue that covers the reasons I’m interested in it, what has to happen for the company to succeed, and the pitfalls that stand in its path.  The two-minute monologue can be muttered under your breath or repeated out loud to colleagues who happen to be standing within earshot.  Once you’re able to tell the story of a stock to your family, your friends, or the dog… and so that even a child could understand it, then you have a proper grasp of the situation.

Usually there are just a few key variables for a given investment idea.  As value investor Bruce Berkowitz has said:

We’ve always done very well when we can use sixth-grade math on the back of a postcard to show how inexpensive something is relative to its free cash.

One good way to gain insight is to ask the executive of a company what he or she thinks the competition is doing right.  Lynch discovered La Quinta Motor Inns while he was talking to the vice president of United Inns, a competitor.

Lynch later learned that La Quinta’s strategy was simple:  to have both costs and prices that are 30% lower than Holiday Inn.  La Quinta had everything exactly the same as at a Holiday Inn—same size rooms, same size beds, etc.  However:

La Quinta had eliminated the wedding area, the conference rooms, the large reception area, the kitchen area, and the restaurant—all excess space that contributed nothing to the profits but added substantially to the costs.  La Quinta’s idea was to install a Denny’s or some similar 24-hour place next door to every one of its motels.  La Quinta didn’t even have to own the Denny’s.  Somebody else could worry about the food.  Holiday Inn isn’t famous for its cuisine, so it’s not as if La Quinta was giving up a major selling point…  It turns out that most hotels and motels lose money on their restaurants, and the restaurants cause 95 percent of the complaints.



If it’s a microcap business, then you may be able to speak with a top executive simply by calling the company.  For larger companies, often you will only reach investor relations.  Either way, you want to check the story you’ve developed—your investment thesis—against the facts you’re able to glean through conversation (and through reading the financial statements, etc.).

If you don’t have a story developed enough to check, there are two general questions you can always ask, notes Lynch:

  • What are the positives this year?
  • What are the negatives?

Often your ideas will not be contradicted.  But occasionally you’ll learn something unexpected, that things are either better or worse than they appear.  Such unexpected information can be very profitable because it is often not yet reflected in the stock price.  Lynch says he comes across something unexpected in about one out of every ten phone calls he makes.

Lynch also often will visit headquarters.  The goal, he says, is to get a feel for the place.  What Lynch really appreciates is when headquarters is obviously shabby, indicating that the executives are keeping costs as low as possible.  When headquarters is very nice and fancy, that’s generally a bad signal about management.

Kicking the tires can help.  It’s not a substitute for studying the financial statements or for asking good questions.  But it can help you check out the practical side of the investment thesis.  Lynch used to make a point of checking out as many companies as possible this way.

Finally, in addition to reading the financial statements, Lynch recommends Value Line.



If you’re looking at a particular product, then you need to know what percent of sales that particular product represents.

Lynch then notes that you can compare the p/e and the growth rate:

If the p/e of Coca-Cola is 15, you’d expect the company to be growing at about 15 percent a year, etc.  But if the p/e ratio is less than the growth rate, you may have found yourself a bargain.  A company, say, with a growth rate of 12 percent a year… and a p/e of 6 is a very attractive prospect.  On the other hand, a company with a growth rate of 6 percent a year and a p/e ratio of 12 is an unattractive prospect and headed for a comedown.

In general, a p/e that’s half the growth rate is very positive, and one that’s twice the growth rate is very negative.

You can do a similar calculation by taking earnings, adding dividends, and comparing that sum to the growth rate.

High debt-to-equity is something to avoid.  Turnarounds with high debt tend to work far less often than turnarounds with low debt.

Free cash flow is important.  Free cash flow equals net income plus depreciation, depletion, and amortization, minus capital expenditures.  (There may also be adjustments for changes in working capital.)

The important point is that some companies and some industries—such as steel or autos—are far more capital-intensive than others.  Some companies have to spend most of their incoming cash on capital expenditures just to maintain the business at current levels.  Other companies have far lower reinvestment requirements; this means a much higher return on invested capital.  The value that any given company creates over time is the cumulative difference between the return on invested capital and the cost of capital.

Another thing to track is inventories.  If inventories have been piling up recently, that’s not a good sign.  When inventories are growing faster than sales, that’s a red flag.  Lynch notes that if sales are up 10 percent, but inventories are up 30 percent, then you should be suspicious.

Like Buffett, Lynch observes that a company that can raise prices year after year without losing customers can make for a terrific investment.  Such a company will tend to have high free cash flow and high return on invested capital over time.

A last point Lynch makes is about the growth rate of earnings:

All else being equal, a 20-percent grower selling as 20 times earnings (a p/e of 20) is a much better buy than a 10-percent grower selling at 10 times earnings (a p/e of 10).  This may sound like an esoteric point, but it’s important to understand what happens to the earnings of the faster growers that propels the stock price.

Lynch gives an example.  Assume Company A and Company B both start with earnings of $1.00 per share.  But assume that Company A grows at 20 percent a year while Company B grows at 10 percent a year.  (So the stock of Company A starts at $20, while the stock of Company B is at $10.)  What happens after 10 years, assuming the growth rates stay the same?  Company A will be earning $6.19 while Company B will be earning $2.59.

If the multiples haven’t changed, then the stock of Company A will be at $123.80, while the stock of Company B will only be at $26.  Even if the p/e for Company A falls to 15 instead of 20, the stock will still be at $92.  Going from $20 to $92 (or $123.80) is clearly better than going from $10 to $26.

One last point.  In the case of a successful turnaround, the stock of a relatively low-profit margin (and perhaps also high debt) company will do much better than the stock of a relatively high-profit margin (and low debt) company.  It’s just a matter of leverage.

For a long-term stock that you’re going to hold through good times and bad, you want high profit margins and low debt.  If you’re going to invest in a successful turnaround, then you want low profit margins and high debt, all else equal.  (In practice, most turnarounds don’t work, and high debt should be avoided unless you want to specialize in equity stubs.)



Every few months, you should check in on the company.  Are they on track?  Have they made any adjustments to their plan?  How are sales?  How are the earnings?  What are industry conditions?  Are their products still attractive?  What are their chief challenges?  Et cetera.  Basically, writes Lynch, have any new cards been turned over?

In the case of a growth company, Lynch holds that there are three phases.  In the start-up phase, the company may still be working the kinks out of the business.  This is the riskiest phase because the company isn’t yet established.  The second phase is rapid expansion.  This is generally the safest phase, and also where you can make the most money as an investor.  The third phase is the mature phase, or the saturation phase, when growth has inevitably slowed down.  The third phase can be the most problematic, writes Lynch, since it gets increasingly difficult to grow earnings.



Lynch offers a brief checklist.

  • The p/e ratio. Is it high or low for this particular company and for similar companies in the same industry.
  • The percentage of institutional ownership. The lower the better.
  • Whether insiders are buying and whether the company itself is buying back its own shares.  Both are positive signs.
  • The record of earnings growth to date and whether the earnings are sporadic or consistent. (The only category where earnings may not be important is in the asset play.)
  • Whether the company has a strong balance sheet or a weak balance sheet (high debt-to-equity ratio) and how it’s rated for financial strength.
  • The cash position.  With $16 in net cash, I know Ford is unlikely to drop below $16 a share.

Lynch also gives a checklist for each of the six categories.  Then he gives a longer checklist summarizes all the main points (which have already been mentioned in the previous sections).



Some years you’ll make 30 percent, other years you’ll make 2 percent, and occasionally you’ll lose 20 or 30 percent.  It’s important to stick to a disciplined approach and not get impatient.  Stick with the long-term strategy through good periods and bad.  (Even great investors have periods of time when their strategy trails the market, often even several years in a row.)

Regarding the number of stocks to own, Lynch mentions a couple of stocks in which he wouldn’t mind investing his entire portfolio.  But he says you need to analyze each stock one at a time:

…The point is not to rely on any fixed number of stocks but rather to investigate how good they are, on a case-by-case basis.

In my view it’s best to own as many stocks as there are situations in which:  (a) you’ve got an edge; and (b) you’ve uncovered an exciting prospect that passes all the tests of research.  Maybe it’s a single stock, or maybe it’s a dozen stocks.  Maybe you’ve decided to specialize in turnarounds or asset plays and you buy several of those;  or perhaps you happen to know something special about a single turnaround or a single asset play.  There’s no use diversifying into unknown companies just for the sake of diversity.  A foolish diversity is the hobgoblin of small investors.

Lynch then recommends, for small portfolios, owning between 3 and 10 stocks.  It makes sense to concentrate on your best ideas and on what you understand best.  At the same time, it often happens that the tenbagger comes—unpredictably—from your 8th or 9th best idea.  The value investor Mohnish Pabrai has had this experience.

  • Important Note:  One of the best edges you can have as an individual investor—in addition to being able to focus on microcap companies—is that you can have at least a 3- to 5-year holding period.  Because so many investors focus on shorter periods of time, very often the best bargains are stocks that are cheap relative to earnings in 3 to 5 years.

Lynch advises against selling winners and holding on to losers, which is like pulling out the flowers and watering the weeds.  But Lynch’s real point is that price movements are often random.  Just because a stock has gone up or down doesn’t mean the fundamental value of the business has changed.

If business value has increased—or if fundamentals have improved—then it often makes sense to add to a stock even if it’s gone from $11 to $19.

If business value has not declined, or has improved, then it often makes sense to add to a stock that has declined.  On the other hand, if business value has decreased—or if fundamentals have deteriorated—then it often makes sense to sell, regardless of whether the stock has gone up or down.

In general, as long as the investment thesis is intact and business value is sufficiently high, you should hold a stock for at least 3 to 5 years:

If I’d believed in ‘Sell when it’s a double,’ I would never have benefited from a single big winner, and I wouldn’t have been given the opportunity to write a book.  Stick around to see what happens—as long as the original story continues to make sense, or gets better—and you’ll be amazed at the results in several years.



Often there is tax loss selling near the end of the year, which means it can be a good time to buy certain stocks.

As mentioned, you should hold for at least 3 to 5 years as long as the investment thesis is intact and normalized business value is sufficiently high.  Be careful not to listen to negative nellies who yell ‘Sell!’ way before it’s time:

Even the most thoughtful and steadfast investor is susceptible to the influence of skeptics who yell ‘Sell’ before it’s time to sell.  I ought to know.  I’ve been talked out of a few tenbaggers myself.

Lynch took a big position in Toys ‘R’ Us in 1978.  He had done his homework, and he loaded up at $1 per share:

…By 1985, when Toys ‘R’ Us hit $25, it was a 25-bagger for some.  Unfortunately, those some didn’t include me, because I sold too soon.  I sold too soon because somewhere along the line I’d read that a smart investor named Milton Petrie, one of the deans of retailing, had bought 20 percent of Toys ‘R’ Us and that his buying was making the stock go up.  The logical conclusion, I thought, was that when Petrie stopped buying, the stock would go down.  Petrie stopped buying at $5.

I got in at $1 and out at $5 for a fivebagger, so how can I complain?  We’ve all been taught the same adages:  ‘Take profits when you can,’ and ‘A sure gain is always better than a possible loss.’  But when you’ve found the right stock and bought it, all the evidence tells you it’s going higher, and everything is working in your direction, then it’s a shame if you sell.

Lynch continues by noting that individual investors are just as susceptible to selling early as are professional investors:

Maybe you’ve received the ‘Congratulations: Don’t Be Greedy’ announcement.  That’s when the broker calls to say:  ‘Congratulations, you’ve doubled your money on ToggleSwitch, but let’s not be greedy.  Let’s sell ToggleSwitch and try KinderMind.’  So you sell ToggleSwitch and it keeps going up, while KinderMind goes bankrupt, taking all of your profits with it.

One major problem for all investors is that there are so many market, economic, and political forecasts.  Market forecasts and economic forecasts can be very expensive if you follow them, as Buffett has often noted.  The only thing you can really know is the individual company in which you’ve invested, and what its long-term business value is.  Everything else is noise that can only interfere with your ability to focus on long-term business value.

I quoted Buffett earlier.  Now let’s quote the father of value investing, Buffett’s teacher and mentor, Ben Graham:

… if I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen to the stock market.

This has happened in recent years, too.  Ever since 2012 or 2013, some exceptionally intelligent and well-informed people have been predicting some sort of reversion to the mean or bear market.  But it just hasn’t happened.  Of course, there could be a bear market and/or recession at any time.  But even then, there will be at least a few stocks somewhere in the world that perform well if bought cheaply enough.

The main point made by Graham and Buffett is that repeatedly buying stocks at bargain levels relative to business value can work very well over time if you’re patient and disciplined.  Market forecasting can only distract you from what works.

What works is investing in businesses you can understand at sensible prices, and holding each one for at least 3 to 5 years, if not 10 years or longer, as long as the thesis is intact.  Lynch:

Frankly, I’ve never been able to predict which stocks will go up tenfold, or which will go up fivefold.  I try to stick with them as long as the story’s intact, hoping to be pleasantly surprised.  The success of a company isn’t the surprise, but what the shares bring often is.  I remember buying Stop & Shop as a conservative, dividend-paying stock, and then the fundamentals kept improving and I realized I had a fast grower on my hands.

It’s important to note that sometimes years can go by while the stock does nothing.  That, in itself, doesn’t tell you anything.  If the business continues to make progress, and long-term business value is growing (or is sufficiently high), then you should stick with it or perhaps add to the position:

Here’s something else that’s certain to occur:  If you give up on a stock because you’re tired of waiting for something wonderful to happen, then something wonderful will begin to happen the day after you get rid of it.  I call this the postdiverstiture flourish.

…Most of the money I make is in the third or fourth year that I’ve owned something… If all’s right with the company, and whatever attracted me in the first place hasn’t changed, then I’m confident that sooner or later my patience will be rewarded.

…It takes remarkable patience to hold on to a stock in a company that excites you, but which everybody else seems to ignore.  You begin to think everybody else is right and you are wrong.  But where the fundamentals are promising, patience is often rewarded…

Lynch again later:

… my biggest winners continue to be stocks I’ve held for three and even four years.

Lynch offers much commentary on a long list of macro concerns that are going to sink stocks.  (Remember he was writing in 1989.)  Here is a snipet:

I hear every day that AIDS will do us in, the drought will do us in, inflation will do us in, recession will do us in, the budget deficit will do us in, the trade deficit will do us in, and the weak dollar will do us in.  Whoops.  Make that the strong dollar will do us in.  They tell me real estate prices are going to collapse.  Last month people started worrying about that.  This month they’re worrying about the ozone layer.  If you believe the old investment adage that the stock market climbs a ‘wall of worry,’ take note that the worry wall is fairly good-sized now and growing every day.

Like Buffett, Lynch is very optimistic about America and long-term investing in general.  Given the strengths of America, and all the entrepreneurial and scientific energy creating ongoing innovation, it seems to me that Buffett and Lynch are right to be long-term optimists.  That’s not to say there won’t be setbacks, recessions, bear markets, and other problems.  But such setbacks will be temporary.  Over the long term, innovation will amaze, profits will grow, and stocks will follow profits higher.



An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.


If you are interested in finding out more, please e-mail me or leave a comment.

My e-mail:




Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

Compound Interest Can Change Your Life

(Image:  Zen Buddha Silence by Marilyn Barbone.)

January 23, 2022

Here is our performance for 2021 and since inception (June 9, 2020):

  Boole Microcap Fund Russell Microcap Index S&P 500 Index
2021 net return  45.9% 18.3% 28.8%
2020 net return from inception (06/09/21) 21.1% 31.7% 16.3%
Compounded annual return (net) 32.9% 24.8% 22.4%
Overall gain (net) 76.7% 55.8% 49.8%

Albert Einstein is reputed to have said:

Compound interest is the eighth wonder of the world.  He who understands it, earns it; he who doesn’t, pays it.

If you invest today and stay invested, there are two factors that determine how much that investment will be worth in the future:

    • The length of time over which you invest.
    • The average annual rate of return on your investment.

The earlier you start investing, the more time you have to let the magic of compounding work for you.

Also, the higher the average annual rate of return you can get on your investment, the greater the sum you will have later.



If you earn interest on an investment and then reinvest that interest; and if you then earn interest on the new balance (the original principal plus the reinvested interest); and if you then reinvest that interest, etc., that is compound interest.

For example, say you invest $1,000 and say you can earn 4% a year consistently for thirty years.

First, let’s say that you DO NOT reinvest interest.

    • That means each year you will get $40 in interest on your principal of $1,000.
    • At the end of thirty years, you will have gotten $40 in interest thirty times for a total of $1,200 in interest.
    • Your principal plus interest after thirty years will be $2,200.

Now, let’s say you DO reinvest interest.

    • At the end of the first year, you’ll get $40 in interest.  Your principal plus interest will be $1,040.
    • Since you reinvest the $40, then in the second year, instead of getting 4% interest on $1,000, you’ll get 4% interest on $1,040.  So instead of getting another $40 in interest (4% of $1,000), you’ll get $41.60 in interest (4% of $1,040).
    • At the end of the second year, instead of $1,080 ($1,o00 in principal plus $80 in interest), you’ll have $1,081.60 ($1,o00 in principal plus $81.60 in interest).
    • Since you reinvest the new $41.60, then in the third year, instead of getting $40 in interest  (4% of $1,000), you’ll get $43.30 in interest (4% of $1,081.60).
    • At the end of the third year, instead of $1,120 ($1,000 in principal plus $120 in interest), you’ll have $1,124.90 ($1,000 in principal plus $124.90 in interest).
    • So it continues.
    • After thirty years of reinvesting the interest, instead of $1,200 in interest, you’ll have $2,243.40 in interest.  So instead of a total of $2,200 ($1,000 in principal plus $1,200 in interest), you’ll have $3,243.40 ($1,000 in principal plus $2,243.40 in interest).



The earlier you start investing—that is, the longer the period of time over which you invest—the greater the sum you will end up with.

Consider this example:

    • If you invest $50,000 at 10% a year for twenty years, you will end up with about $336,000.
    • If you invest $50,000 at 10% a year for thirty years, you will end up with about $872,000.



The higher the average annual rate of return you get, the greater the sum you will end up with.

Consider this example:

    • If you invest $50,000 at 10% a year for thirty years, we already saw that you will end up with about $872,000.
    • If you invest $50,000 at 20% a year for thirty years, you will end up with about $11,869,000.

$11.87 million vs. $872,000: This is a stunning difference.



If you invest in an S&P 500 index fund, then over the very long term, you can get approximately 9-10% a year.   That is solid.

If you invest systematically in undervalued microcap stocks with improving fundamentals, then you can get approximately 18-20% a year.  This is much better, especially if you invest over a long period of time.  See:

Please contact me if you would like to learn more.

    • My email:
    • My cell: 206.518.2519



An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.


If you are interested in finding out more, please e-mail me or leave a comment.

My e-mail:




Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

How Great Leaders Build Sustainable Businesses

(Image:  Zen Buddha Silence by Marilyn Barbone.)

January 16, 2022

Ian Cassell and Sean Iddings are successful microcap investors who co-authored the book, Intelligent Fanatics Project: How Great Leaders Build Sustainable Businesses (Iddings Cassel Publishing, 2016).  Ian Cassell is the founder of

If a microcap company is led by an intelligent fanatic, then it has a good chance of becoming a much larger company over time.  So, for a long-term investor, it makes sense to look for an intelligent fanatic who is currently leading a microcap company.  Cassel:

I want to find Reed Hastings in 2002, when Netflix (NFLX) was a $150 million market cap microcap (now worth $38 billion).  I want to find Bruce Cozadd in 2009, when Jazz Pharmaceuticals (JAZZ) was a $50 million market cap microcap (now worth $9 billion).

All great companies started as small companies, and intelligent fanatics founded most great companies.  So how do we find these rare intelligent fanatics early?  We find them by studying known intelligent fanatics and their businesses.  We look for common elements and themes, to help us in our search for the next intelligent fanatic-led business.

The term intelligent fanatic is originally from Charlie Munger.  Cassel defines the term:

CEO or management team with large ideas and fanatical drive to build their moat.  Willing and able to think and act unconventionally.  A learning machine that adapts to constant change.  Focused on acquiring the best talent.  Able to create a sustainable corporate culture and incentivize their operations for continual progress.  Their time horizon is in five- or ten-year increments, not quarterly, and they invest in their business accordingly.  Regardless of the industry, they are able to create a moat [– i.e., a sustainable competitive advantage].

Cassel and Iddings give eight examples of intelligent fanatics:

  • Father of Sales and Innovation: John H. Patterson—National Cash Register
  • Retail Maverick: Simon Marks—Marks & Spencer
  • Original Warehouse Pioneer: Sol Price—Fedmart and Price Club
  • King of Clever Systems: Les Schwab—Les Schwab Tire Centers
  • Low-Cost Airline Wizard: Herb Kelleher—Southwest Airlines
  • Cult of Convenience: Chester Cadieux—QuikTrip
  • Leader of Steel: Kenneth Iverson—Nucor
  • Human Capital Allocators: 3G Partners—Garantia…

Cassel and Iddings conclude by summarizing the intelligent fanatic model.



Patterson purchased control of National Manufacturing Company, the originator of the cash register, in 1885, five years after the company had been formed.  Prospects did not appear good at all:

Everything was against a business selling cash registers at that time.  There was virtually no demand for cash registers.  Store owners could not justify the cost of the machine, which in today’s dollars would be roughly $1,000.  Patterson’s peers mocked his purchase of such a poor business, yet Patterson had a bold vision of what the cash register market could be, and he knew it would make a significant impact.

Patterson had had a great experience with the cash register.  His store in Coalton, Ohio, had immediately turned losses into profits simply by buying and installing a cash register.  It is hard to imagine now but employee theft at retail operations was common, given the primitive form of record keeping in those days.  Patterson knew the power of the cash register and needed to help merchants understand its value, too.

Patterson believed in staying ahead of what the current market was demanding:

We have made a policy to be just a short distance ahead, for the cash register has always had to make its market.  We had to educate our first customers;  we have to educate our present-day customer;  and our thought has always been to keep just so far ahead that education of the buyer will always be necessary.  Thus the market will be peculiarly our own—our customers will feel that we are their natural teachers and leaders.

…We are always working far ahead.  If the suggestions at the tryout demonstrate that the model will be much more valuable with changes or improvements, then send them out again to be tried.  And we keep up this process until every mechanical defect has been overcome and the model includes every feasible suggestion.

Few people at the time believed that the cash register would be widely adopted.  But Patterson predicted at least one cash register for every four hundred citizens in a town.  He was basically right.

Patterson started out working at the store on the family farm.  He was frustrated by the poor recordkeeping.  The employee books never reconciled.

Patterson then got a job as a toll collector at the Dayton office on the Miami and Erie Canal.  There were always arguments, with the bargemen complaining about higher tolls at certain locations.  Patterson solved the issue by developing a system of receipts, all of which would be sent to toll headquarters.

Patterson had extra time as a toll collector, so he started selling coal and wood out of his office.  He learned that he could differentiate himself by selling quality coal delivered on time and in the right quantity.  He also used the best horses, the best scales, and the best carts.  He made sure everything was quality and high-class.  His main challenge was that he never seemed to have enough cash since he was always reinvesting in the business, including advertising.

Eventually Patterson and his brother owned three coal mines, a store, and a chain of retail coal yards.  He had trouble with his mine store in Coalton, Ohio.  Revenues were high, but there were no profits and debt was growing.  He discovered that some clerks were only charging for half the coal.  Patterson bought two cash registers and hired new clerks.  Six months later, the debt was almost zero and there were profits.

Patterson then entered a venture to take one-third of the profits for operating the Southern Coal and Iron Company.  Unfortunately, this proved to be a disaster.  Patterson lost three years of his life and half his investment.

Meanwhile, Patterson had purchased stock in the cash register manufacturer National Manufacturing Company.  Patterson was also on the board of the company.  Patterson came up with a plan to increase sales, but the controlling shareholder and CEO, George Phillips, did not agree.  Patterson sold most of his stock.

But Patterson still believed in the idea of the cash register.  He was able to buy shares in National Manufacturing Company from George Phillips.  Patterson became the butt of Dayton jokes for buying such a bad business.  Patterson even tried to give his shares back to Phillips, but Phillips wouldn’t take them even as a gift.  So Patterson formed the National Cash Register Company.

Patterson started advertising directly to prospects through the mail.  He then sent highly qualified salesmen to those same prospects.  Patterson decided to pay his salesmen solely on commission and with no cap on how much they could make.  This was unconventional at the time, but it created effective incentives.  Patterson also bought expensive clothes for his salesmen, and at least one fine gown for the salesman’s wife.  As a result, the salesmen became high-quality and they also wanted a better standard of living.

Moreover, Patterson systematized the sales pitches of his salesmen.  This meant even salesmen with average ability could and did evolve into great salesmen.  Patterson also designated specific territories for the salesmen so that the salesmen wouldn’t be competing against one another.

Patterson made sure that salesmen and also manufacturing workers were treated well.  When he built new factories, he put in wall-to-wall glass windows, good ventilation systems, and dining rooms where employees could get decent meals at or below cost.  Patterson also made sure his workers had the best tools.  These were unusual innovations at the time.

Patterson also instituted a profit-sharing plan for all employees.

National Cash Register now had every worker aligned with common goals:  to increase efficiency, cut costs, and improve profitability.

Patterson was always deeply involved in the research and development of the cash register.  He often made sketches of new ideas in a memo book.  He got a few of these ideas patented.

NCR’s corporate culture and strategies were so powerful that John H. Patterson produced more successful businessmen than the best university business departments of the day.  More than a dozen NCR alumni went on to head large corporations, and many more went on to hold high corporate positions.

Cassel and Iddings sum it up:

Patterson was a perpetual beginner.  He bought NCR without knowing much of anything about manufacturing – except that he wanted to improve every business owner’s operations.  From his experiences, he took what he knew to be right and paid no attention to convention.  John Patterson not only experimented with improving the cash register machine but also believed in treating employees extremely well.  Many corporations see their employees as an expense line item;  intelligent fanatics see employees as a valuable asset.

When things failed or facts changed, Patterson showed an ability to pivot…

…He was able to get every one of his workers to think like owners, through his profit-sharing plan.  Patterson was always looking to improve production, so he made sure that every employee had a voice in improving the manufacturing operations.



Marks & Spencer was started by Michael Marks as a small outdoor stall in Leeds.  By 1923, when Michael’s son Simon was in charge, the company had grown significantly.  But Simon Marks was worried that efficient American competitors were going to wage price wars and win.

So Marks went to the U.S. to study his competitors.  (Walmart founder Sam Walton would do this four decades later.)  When Marks returned to Britain, he delivered a comprehensive report to his board:

I learned the value of more commodious and imposing premises.  I learned the value of checking lists to control stocks and sales.  I learned that new accounting machines could help to reduce the time formidably, to give the necessary information in hours instead of weeks.  I learned the value of counter footage and how in the chain store operation each foot of counter space had to pay wages, rent, overhead expenses, and profit.  There could be no blind spots insofar as goods are concerned.  This meant a much more exhaustive study of the goods we were selling and the needs of the public.  It meant that the staff who were operating with me had to be reeducated and retrained.

Cassel and Iddings:

…Simon Marks had been left a company with a deteriorating moat and a growing list of competitors.  He had the prescience and boldness to take a comfortable situation, a profitable, growing Marks & Spencer, and to take risks to build a long-term competitive edge.  From that point on, it could have been observed that Simon Marks had only one task – to widen Marks & Spencer’s moat every day for the rest of his life and to provide investors with uncommon profits.

Simon Marks convinced manufacturers that the retailer and manufacturer, by working together without the wholesale middleman, could sell at lower prices.  Marks made sure to maintain the highest quality at the lowest prices, making up for low profit margins with high volume.

Simon Marks was rare.  He was able to combine an appreciation for science and technology with an industry that had never cared to utilize it, all the while maintaining ‘a continuing regard for the individual, either as a customer or employee, and with a deep responsibility for his welfare and well-being.’  Marks & Spencer’s tradition of treating employees well stretched all the way back to Michael Marks’s Penny Bazaars in the covered stalls of Northern England… To Simon Marks, a happy and contented staff was the most valuable asset of any business.

Simon Marks established many policies to better Marks & Spencer’s labor relations, leading to increased employee efficiency and productivity…

Marks introduced dining rooms to provide free or low-cost meals to employees of stores.  Marks even put hair salons in stores so the female workforce could get their hair done during lunch.  He also provided free or reduced-cost health insurance.  Finally, he set up the Marks & Spencer Benevolent Trust to provide for the retirement of employees.  These moves were ahead of their time and led to low employee turnover and high employee satisfaction.



Sol Price founded Price Club in 1976.  The company lost $750,000 during its first year.  But by 1979, revenues reached $63 million, with $1.1 million in after-tax profits.

The strategy was to sell a limited number of items – 1,500 to 5,000 items versus 20,000+ offered by discounters – at a small markup from wholesale, to a small group of members (government workers and credit union customers).

Before founding Price Club, Sol Price founded and built FedMart from one location in 1954 into a company with $361 million in revenue by 1975.

…Thus, when Sol Price founded Price Club, other savvy retailers, familiar with this track record, were quick to pay close attention.  These retailers made it their obligation to meet Price, to learn as much as possible, and to clone Price’s concept.  They knew that the market opportunity was large and that Sol Price was an intelligent fanatic with a great idea.  An astute investor could have done the same and partnered with Price early in 1980 by buying Price Club stock.

One savvy retailer who found Sol Price early in the development of Price Club was Bernard Marcus, cofounder of Home Depot.  After getting fired from the home improvement company Handy Dan, Marcus met with Price, in the late 1970s.  Marcus was looking for some advice from Price about a potential legal battle with his former employer.  Sol Price had a similar situation at FedMart.  He told Marcus to forget about a protracted legal battle and to start his own business.

Marcus borrowed many ideas from Price Club when he cofounded Home Depot.  Later, Sam Walton copied as much as he could from Price Club when he founded Walmart.  Walton:

I guess I’ve stolen – I actually prefer the word borrowed – as many ideas from Sol Price as from anyone else in the business.

Bernie Brotman tried to set up a deal to franchise Price Clubs in the Pacific Northwest.  But Sol Price and his son, Richard Price, were reluctant to franchise Price Club.  Brotman’s son, Jeff Brotman, convinced Jim Sinegal, a long-time Price Club employee, to join him and start Costco, in 1983.

Brotman and Sinegal cloned Price Club’s business model and, in running Costco, copied many of Sol Price’s strategies.  A decade later, Price Club merged with Costco, and many Price Club stores are still in operation today under the Costco name.

Back in 1936, Sol Price graduated with a bachelor’s degree in philosophy.  He got his law degree in 1938.  Sol Price worked for Weinberger and Miller, a local law firm in San Diego.  He represented many small business owners and learned a great deal about business.

Thirteen years later, Price founded FedMart after noticing a nonprofit company, Fedco, doing huge volumes.  Price set up FedMart as a nonprofit, but created a separate for-profit company, Loma Supply, to manage the stores.  Basically, everything was marked up 5% from cost, which was the profit Loma Supply got.

FedMart simply put items on the shelves and let the customers pick out what they wanted.  This was unusual at the time, but it helped FedMart minimize costs and thus offer cheaper prices for many items.

By 1959, FedMart had grown to five stores and had $46.3 million in revenue and nearly $500,000 in profits.  FedMart went public that year and raised nearly $2 million for expansion.

In 1962, Sam Walton had opened the first Walmart, John Geisse had opened the first Target, and Harry Cunningham had opened the first Kmart, all with slight variations on Sol Price’s FedMart business model.

By the early 1970s, Sol Price wasn’t enjoying managing FedMart as much.  He remarked that they were good at founding the business, but not running it.

While traveling in Europe with his wife, Sol Price was carefully observing the operations of different European retailers.  In particular, he noticed a hypermarket retailer in Germany named Wertkauf, run by Hugo Mann.  Price sought to do a deal with Hugo Mann as a qualified partner.  But Mann saw it as a way to buy FedMart.  After Mann owned 64% of FedMart, Sol Price was fired from the company he built.  But Price didn’t let that discourage him.

Like other intelligent fanatics, Sol Price did not sit around and mourn his defeat.  At the age of 60, he formed his next venture less than a month after getting fired from FedMart.  The Price Company was the name of this venture, and even though Sol Price had yet to figure out a business plan, he was ready for the next phase of his career.

…What the Prices [Sol and his son, Robert] ended up with was a business model similar to some of the concepts Sol had observed in Europe.  The new venture would become a wholesale business selling merchandise to other businesses, with a membership system similar to that of the original FedMart but closer to the ‘passport’ system used by Makro, in the Netherlands, in a warehouse setting.  The business would attract members with its extremely low prices.

During the first 45 days, the company lost $420,000.

Instead of doing nothing or admitting defeat, however, Sol Price figured out the problem and quickly pivoted.

Price Club had incorrectly assumed that variety and hardware stores would be large customers and that the location would be ideal for business customers.  A purchasing manager, however, raised the idea of allowing members of the San Diego City Credit Union to shop at Price Club.  After finding out that Price Club could operate as a retail shop, in addition to selling to businesses, the company allowed credit union members to shop at Price Club.  The nonbusiness customers did not pay the $25 annual business membership fee but got a paper membership pass and paid an additional 5% on all goods.  Business members paid the wholesale price.  The idea worked and sales turned around, from $47,000 per week at the end of August to $151,000 for the week of November 21.  The Price Club concept was now proven.

Sol Price’s idea was to have the smallest markup from cost possible and to make money on volume.  This was unconventional.

Price also sought to treat his employees well, giving them the best wages and providing the best working environment.  By treating employees well, he created happy employees who in turn treated customers well.

Instead of selling hundreds of thousands of different items, Sol Price thought that focusing on only a few thousand items would lead to greater efficiency and lower costs.  Also, Price was able to buy in larger quantities, which helped.  This approach gave customers the best deal.  Customers would typically buy a larger quantity of each good, but would generally save over time by paying a lower price per unit of volume.

Sol Price also saved money by not advertising.  Because his customers were happy, he relied on unsolicited testimonials for advertising.  (Costco, in turn, has not only benefitted from unsolicited testimonials, but also from unsolicited media coverage.)

Jim Sinegal commented:

The thing that was most remarkable about Sol was not just that he knew what was right.  Most people know the right thing to do.  But he was able to be creative and had the courage to do what was right in the face of a lot of opposition.  It’s not easy to stick to your guns when you have a lot of investors saying that you’re not charging customers enough and you’re paying employees too much.

Over a thirty-eight year period, including FedMart and then Price Club until the Costco merger in 1993, Sol Price generated roughly a 40% CAGR in shareholder value.



Les Schwab knew how to motivate his people through clever systems and incentives.  Schwab realized that allowing his employees to become highly successful would help make Les Schwab Tire Centers successful.

Schwab split his profits with his first employees, fifty-fifty, which was unconventional in the 1950s.  Schwab would reinvest his portion back into the business.  Even early on, Schwab was already thinking about massive future growth.

As stores grew and turned into what Schwab called ‘supermarket’ tire centers, the number of employees needed to manage the operations increased, from a manager with a few helpers to six or seven individuals.  Schwab, understanding the power of incentives, asked managers to appoint their best worker as an assistant manager and give him 10% of the store’s profits.  Schwab and the manager each would give up 5%.

…Les Schwab was never satisfied with his systems, especially the employee incentives, and always strove to develop better programs.

…Early on, it was apparent that Les Schwab’s motivation was not to get rich but to provide opportunities for young people to become successful, as he had done in the beginning.  This remained his goal for decades.  Specifically, his goal was to share the wealth.  The company essentially has operated with no employees, only partners.  Even the hourly workers were treated like partners.

When Schwab was around fifteen years old, he lost his mother to pneumonia and then his father to alcohol.  Schwab started selling newspapers.  Later as a circulation manager, he devised a clever incentive scheme for the deliverers.  Schwab always wanted to help others succeed, which in turn would help the business succeed.

The desire to help others succeed can be a powerful force.  Les Schwab was a master at creating an atmosphere for others to succeed through clever programs.  Les always told his manager to make all their people successful, because he believed that the way a company treated employees would directly affect how employees would treat the customer.  Schwab also believed that the more he shared with employees, the more the business would succeed, and the more resources that would eventually be available to give others opportunities to become successful.  In effect, he was compounding his giving through expansion of the business, which was funded from half of his profits.

Once in these programs, it would be hard for employees and the company as a whole not to become successful, because the incentives were so powerful.  Schwab’s incentive system evolved as the business grew, and unlike most companies, those systems evolved for the better as he continued giving half his profits to employees.

Like other intelligent fanatics, Schwab believed in running a decentralized business.  This required good communication and ongoing education.



The airline industry has been perhaps the worst industry ever.  Since deregulation in 1978, the U.S. airline industry alone has lost $60 billion.

Southwest Airlines is nearing its forty-third consecutive year of profitability.  That means it has made a profit nearly every year of its corporate life, minus the first fifteen months of start-up losses.  Given such an incredible track record in a horrible industry, luck cannot be the only factor.  There had to be at least one intelligent fanatic behind its success.

…In 1973, the upstart Texas airline, Southwest Airlines, with only three airplanes, turned the corner and reached profitability.  This was a significant achievement, considering that the company had to overcome three and a half years of legal hurdles by two entrenched and better-financed competitors:  Braniff International Airways had sixty-nine aircraft and $256 million in revenues, and Texas International had forty-five aircraft with $32 million in revenues by 1973.

As a young man, Herb ended up living with his mother after his older siblings moved out and his father passed away.  Kelleher says he learned about how to treat people from his mother:

She used to sit up talking to me till three, four in the morning.  She talked a lot about how you should treat people with respect.  She said that positions and titles signify absolutely nothing.  They’re just adornments;  they don’t represent the substance of anybody… She taught me that every person and every job is worth as much as any other person or any other job.

Kelleher ended up applying these lessons at Southwest Airlines.  The idea of treating employees well and customers well was central.

Kelleher did not graduate with a degree in business, but with a bachelor’s degree in English and philosophy.  He was thinking of becoming a journalist.  He ended up becoming a lawyer, which helped him get into business later.

When Southwest was ready to enter the market in Texas as a discount airline, its competitors were worried.

With their large resources, competitors did everything in their power to prevent Southwest from getting off the ground, and they were successful in temporarily delaying Southwest’s first flight.  The incumbents filed a temporary restraining order that prohibited the aeronautics commission from issuing Southwest a certificate to fly.  The case went to trial in the Austin state court, which did not support another carrier entering the market.

Southwest proceeded to appeal the lower court decision that the market could not support another carrier.  The intermediate appellate court sided with the lower court and upheld the ruling.  In the meantime, Southwest had yet to make a single dollar in revenues and had already spent a vast majority of the money it had raised.

The board was understandably frustrated.  At this point, Kelleher said he would represent the company one last time and pay every cent of legal fees out of his own pocket.  Kelleher convinced the supreme court to rule in Southwest’s favor.  Meanwhile, Southwest hired Lamar Muse as CEO, who was an experienced, iconoclastic entrepreneur with an extensive network of contacts.

Herb Kelleher was appointed CEO in 1982 and ran Southwest until 2001.  He led Southwest from $270 million to $5.7 billion in revenues, every year being profitable.  This is a significant feat, and no other airline has been able to match that kind of record in the United States.  No one could match the iron discipline that Herb Kelleher instilled in Southwest Airlines from the first day and maintained so steadfastly through the years.

Before deregulation, flying was expensive.  Herb Kelleher had the idea of offering lower fares.  To achieve this, Southwest did four things.

  • First, they operated out of less-costly and less-congested airports. Smaller airports are usually closer to downtown locations, which appealed to businesspeople.
  • Second, Southwest only operated the Boeing 737. This gave the company bargaining power in new airplane purchases and the ability to make suggestions in the manufacture of those plans to improve efficiency.  Also, operating costs were lower because everyone only had to learn to operate one type of plane.
  • Third, Southwest reduced the amount of time planes were on the ground to 10 minutes (from 45 minutes to an hour).
  • Fourth, Southwest treats employees well and is thus able to retain qualified, hardworking employees. This cuts down on turnover costs.

Kelleher built an egalitarian culture at Southwest where each person is treated like everyone else.  Also, Southwest was the first airline to share profits with employees.  This makes employees think and act like owners.  As well, employees are given autonomy to make their own decisions, as an owner would.  Not every decision will be perfect, but inevitable mistakes are used as learning experiences.

Kelleher focused the company on being entrepreneurial even as the company grew.  But simplifying did not include eliminating employees.

Southwest Airlines is the only airline – and one of the few corporations in any industry – that has been able to run for decades without ever imposing a furlough.  Cost reductions are found elsewhere, and that has promoted a healthy morale within the Southwest Airlines corporate culture.  Employees have job security.  A happy, well-trained labor force that only needs to be trained on one aircraft promotes more-efficient and safer flights.  Southwest is the only airline that has a nearly perfect safety record.

Kelleher once told the following story:

What I remember is a story about Thomas Watson.  This is what we have followed at Southwest Airlines.  A vice president of IBM came in and said, ‘Mr. Watson, I’ve got a tremendous idea…. And I want to set up this little division to work on it.  And I need ten million dollars to get it started.’  Well, it turned out to be a total failure.  And the guy came back to Mr. Watson and he said that this was the original proposal, it cost ten million, and that it was a failure.  ‘Here is my letter of resignation.’  Mr. Watson said, ‘Hell, no!  I just spent ten million on your education.  I ain’t gonna let you leave.’  That is what we do at Southwest Airlines.

One example is Matt Buckley, a manager of cargo in 1985.  He thought of a service to compete with Federal Express.  Southwest let him try it.  But it turned out to be a mistake.  Buckley:

Despite my overpromising and underproducing, people showed support and continued to reiterate, ‘It’s okay to make mistakes;  that’s how you learn.’  In most companies, I’d probably have been fired, written off, and sent out to pasture.

Kelleher believed that any worthwhile endeavor entails some risk.  You have to experiment and then adjust quickly when you learn what works and what doesn’t.

Kelleher also created a culture of clear communication with employees, so that employees would understand in more depth how to minimize costs and why it was essential.

Communication with employees at Southwest is not much different from the clear communication Warren Buffett has had with shareholders and with his owned operations, through Berkshire Hathaway’s annual shareholder letters.  Intelligent fanatics are teachers to every stakeholder.



Warren Buffett:

Back when I had 10,000 bucks, I put 2,000 of it into a Sinclair service station, which I lost, so my opportunity cost on it’s about 6 billion right now.  A fairly big mistake – it makes me feel good when Berkshire goes down, because the cost of my Sinclair station goes down too.

Chester Cadieux ran into an acquaintance from school, Burt B. Holmes, who was setting up a bantam store – an early version of a convenience store.  Cadieux invested $5,000 out of the total $15,000.

At the time, in 1958, there were three thousand bantam stores open.  They were open longer hours than supermarkets, which led customers to be willing to pay higher prices.

Cadieux’s competitive advantage over larger rivals was his focus on employees and innovation.  Both characteristics were rooted in Chester’s personal values and were apparent early in QuikTrip’s history.  He would spend a large part of his time – roughly two months out of the year – in direction communication with QuikTrip employees.  Chester said, ‘Without fail, each year we learned something important from a question or comment voiced by a single employee.’  Even today, QuikTrip’s current CEO and son of Chester Cadieux, Chet Cadieux, continues to spend four months of his year meeting with employees.

Cassel and Iddings:

Treat employees well and incentivize them properly, and employees will provide exceptional service to the customers.  Amazing customer service leads to customer loyalty, and this is hard to replicate, especially by competitors who don’t value their employees.  Exceptional employees and a quality corporate culture have allowed QuikTrip to stay ahead of competition from convenience stores, gas retailers, quick service restaurants, cafes, and hypermarkets.

Other smart convenience store operators have borrowed many ideas from Chester Cadieux.  Sheetz, Inc. and Wawa, Inc. – both convenience store chains headquartered in Pennsylvania – have followed many of Cadieux’s ideas.  Cadieux, in turn, has also picked up a few ideas from Sheetz and Wawa.

Sheetz, Wawa, and QuikTrip all have similar characteristics, which can be traced back to Chester Cadieux and his leadership values at QuikTrip.  When three stores in the same industry, separated only by geography, utilize the same strategies, have similar core values, and achieve similar success, then there must be something to their business models.  All could have been identified early, when their companies were much smaller, with qualitative due diligence.

One experience that shaped Chester Cadieux was when he was promoted to first lieutenant at age twenty-four.  He was the senior intercept controller at his radar site, and he had to lead a team of 180 personnel:

…he had to deal with older, battle-hardened sergeants who did not like getting suggestions from inexperienced lieutenants.  Chester said he learned ‘how to circumvent the people who liked to be difficult and, more importantly, that the number of stripes on someone’s sleeves was irrelevant.’  The whole air force experience taught him how to deal with people, as well as the importance of getting the right people on his team and keeping them.

When Cadieux partnered with Burt Holmes on their first QuikTrip convenience store, it seemed that everything went wrong.  They hadn’t researched what the most attractive location would be.  And Cadieux stocked the store like a supermarket.  Cadieux and Holmes were slow to realize that they should have gone to Dallas and learned all they could about 7-Eleven.

QuikTrip was on the edge of bankruptcy during the first two or three years.  Then the company had a lucky break when an experienced convenience store manager, Billy Neale, asked to work for QuikTrip.  Cadieux:

You don’t know what you don’t know.  And when you figure it out, you’d better sprint to fix it, because your competitors will make it as difficult as possible in more ways than you could ever have imagined.

Cadieux was smart enough to realize that QuikTrip survived partly by luck.  But he was a learning machine, always learning as much as possible.  One idea Cadieux picked up was to sell gasoline.  He waited nine years until QuikTrip had the financial resources to do it.  Cadieux demonstrated that he was truly thinking longer term.

QuikTrip has always adapted to the changing needs of its customers, demographics, and traffic patterns, and has constantly looked to stay ahead of competition.  This meant that QuikTrip has had to reinvest large sums of capital into store updates, store closures, and new construction.  From QuikTrip’s inception, in 1958, to 2008, the company closed 418 stores;  in 2008, QuikTrip had only five hundred stores in operation.

QuikTrip shows its long-term focus by its hiring process.  Cadieux:

Leaders are not necessarily born with the highest IQs, or the most drive to succeed, or the greatest people skills.  Instead, the best leaders are adaptive – they understand the necessity of pulling bright, energetic people into their world and tapping their determination and drive.  True leaders never feel comfortable staying in the same course for too long or following conventional wisdom – they inherently understand the importance of constantly breaking out of routines in order to recognize the changing needs of their customers and employees.

QuikTrip interviews about three out of every one hundred applicants and then chooses one from among those three.  Only 70% of new hires make it out of training, and only 50% of those remaining make it past the first 6 months on the job.  But QuikTrip’s turnover rate is roughly 13% compared to the industry average of 59%.  These new hires are paid $50,000 a year.  And QuikTrip offers a generous stock ownership plan.  Employees also get medical benefits and a large amount of time off.

Cadieux’s main goal was to make employees successful, thereby making customers and eventually shareholders happy.



Ken Iverson blazed a new trail in steel production with the mini mill, thin-slab casting, and other innovations.  He also treated his employees like partners.  Both of these approaches were too unconventional and unusual for the old, slow-moving, integrated steel mills to compete with.  Ken Iverson harnessed the superpower of incentives and effective corporate culture.  He understood how to manage people and had a clear goal.

In its annual report in 1975, Nucor had all of its employees listed on the front cover, which showed who ran the company.  Every annual report since then has listed all employees on the cover.  Iverson:

I have no desire to be perfect.  In fact, none of the people I’ve seen do impressive things in life are perfect… They experiment.  And they often fail.  But they gain something significant from every failure.

Iverson studied aeronautical engineering at Cornell through the V-12 Navy College Training Program.  Iverson spent time in the Navy, and then earned a master’s degree in mechanical engineering from Purdue University.  Next he worked as an assistant to the chief research physicist at International Harvester.

Iverson’s supervisor told him you can achieve more at a small company.  So Iverson started working as the chief engineer at a small company called Illium Corp.  Taking chances was encouraged.  Iverson built a pipe machine for $5,000 and it worked, which saved the company $245,000.

Iverson had a few other jobs.  He helped Nuclear Corporation of America find a good acquisition – Vulcraft Corporation.  After the acquisition, Vulcraft made Iverson vice president.  The company tripled its sales and profits over the ensuing three years, while the rest of Nuclear was on the verge of bankruptcy.  When Nuclear’s president resigned, Iverson became president of Nuclear.

Nuclear Corporation changed its name to Nucor.  Iverson cut costs.  Although few could have predicted it, Nucor was about to take over the steel industry.  Iverson:

At minimum, pay systems should drive specific behaviors that make your business competitive.  So much of what other businesses admire in Nucor – our teamwork, extraordinary productivity, low costs, applied innovation, high morale, low turnover – is rooted in how we pay our people.  More than that, our pay and benefit programs tie each employee’s fate to the fate of our business.  What’s good for the company is good – in hard dollar terms – for the employee.

The basic incentive structure had already been in place at Vulcraft.  Iverson had the sense not to change it, but rather to improve it constantly.  Iverson:

As I remember it, the first time a production bonus was over one hundred percent, I thought that I had created a monster.  In a lot of companies, I imagine many of the managers would have said, ‘Whoops, we didn’t set that up right.  We’d better change it.’  Not us.  We’ve modified it some over the years.  But we’ve stayed with that basic concept ever since.

Nucor paid its employees much more than what competitors paid.  But Nucor’s employees produced much, much more.  As a result, net costs were lower for Nucor.  In 1996, Nucor’s total cost was less than $40 per ton of steel produced versus at least $80 per ton of steel produced for large integrated U.S. steel producers.

Nucor workers were paid a lower base salary – 65% to 70% of the average – but had opportunities to get large bonuses if they produced a great deal.

Officer bonuses (8% to 24%) were tied to the return on equity.

Nonproduction headquarter staff, engineers, secretaries, and so on, as well as department managers, could earn 25% to 82% of base pay based on their division’s return on assets employed.  So, if a division did not meet required returns, those employees received nothing, but they received a significant amount if they did.  There were a few years when all employees received no bonuses and a few years when employees maxed out their bonuses.

An egalitarian incentive structure leads all employees to feel equal, regardless of base pay grade or the layer of management an employee is part of.  Maintenance workers want producers to be successful and vice versa.

All production workers, including managers, wear hard hats of the same color.  Everyone is made to feel they are working for the common cause.  Nucor has only had one year of losses, in 2009, over a fifty-year period.  This is extraordinary for the highly cyclical steel industry.

Iverson, like Herb Kelleher, believed that experimentation – trial and error – was essential to continued innovation.  Iverson:

About fifty percent of the things we try really do not work out, but you can’t move ahead and develop new technology and develop a business unless you are willing to take risks and adopt technologies as they occur.



3G Partners refers to the team of Jorge Paulo Lemann, Carlos Alberto “Beto” Sicupira, and Marcel Hermann Telles.  They have developed the ability to buy underperforming companies and dramatically improve productivity.

When the 3G partners took control of Brahma, buying a 40% stake in 1989, it was the number two beer company in Brazil and was quickly losing ground to number one, Antarctica.  The previously complacent management and company culture generated low productivity – approximately 1,200 hectoliters of beverage produced per employee.  There was little emphasis on profitability or achieving more efficient operations.  During Marcel Telles’s tenure, productivity per employee multiplied seven times, to 8,700 hectoliters per employee.  Efficiency and profitability were top priorities of the 3G partners, and the business eventually held the title of the most efficient and profitable brewer in the world.  Through efficiency of operations and a focus on profitability, Brahma maintained a 20% return on capital, a 32% compound annual growth rate in pretax earnings, and a 17% CAGR in revenues over the decade from 1990 to 1999… Shareholder value creation stood at an astounding 42% CAGR over that period.

…Subsequent shareholder returns generated at what eventually became Anheuser-Busch InBev (AB InBev) have been spectacular, driven by operational excellence.

Jorge Paulo Lemann – who, like Sicupira and Telles, was born in Rio de Janeiro – started playing tennis when he was seven.  His goal was to become a great tennis player.  He was semi-pro for a year after college.  Lemann:

In tennis you win and lose.  I’ve learned that sometimes you lose.  And if you lose, you have to learn from the experience and ask yourself, ‘What did I do wrong?  What can I do better?  How am I going to win next time?’

Tennis was very important and gave me the discipline to train, practice, and analyze… In tennis you have to take advantage of opportunities.

So my attitude in business was always to make an effort, to train, to be present, to have focus.  Occasionally an opportunity passed and you have to grab those opportunities.

In 1967, Lemann started working for Libra, a brokerage.  Lemann owned 13% of the company and wanted to create a meritocratic culture.  But others disagreed with him.

In 1971, Lemann founded Garantia, a brokerage.  He aimed to create a meritocratic culture like the one at Goldman Sachs.  Lemann would seek out top talent and then base their compensation on performance.  Marcel Telles and Beto Sicupira joined in 1972 and 1973, respectively.

Neither Marcel Telles nor Beto Sicupira started off working in the financial markets or high up at Garantia.  Both men started at the absolute bottom of Garantia, just like any other employee…

Jorge Paulo Lemann initially had a 25% interest in Garantia, but over the first seven years increased it to 50%, slowly buying out the other initial investors.  However, Lemann also wanted to provide incentives to his best workers, so he began selling his stake to new partners.  By the time Garantia was sold, Lemann owned less than 30% of the company.

Garantia transformed itself into an investment bank.  It was producing a gusher of cash.  The partners decided to invest in underperforming companies and then introduce the successful, meritocratic culture at Garantia.  In 1982, they invested in Lojas Americanas.

Buying control of outside businesses gave Lemann the ability to promote his best talent into those businesses.  Beto Sicupira was appointed CEO and went about turning the company around.  The first and most interesting tactic Beto utilized was to reach out to the best retailers in the United States, sending them all letters and asking to meet them and learn about their companies;  neither Beto nor his partners had any retailing experience.  Most retailers did not respond to this query, but one person did:  Sam Walton of Walmart.

The 3G partners met in person with the intelligent fanatic Sam Walton and learned about his business.  Beto was utilizing one of the most important aspects of the 3G management system:  benchmarking from the best in the industry.  The 3G partners soaked up everything from Walton, and because the young Brazilians were a lot like him, Sam Walton became a mentor and friend to all of them.

In 1989, Lemann noticed an interesting pattern:

I was looking at Latin America and thinking, Who was the richest guy in Venezuela?  A brewer (the Mendoza family that owns Polar).  The richest guy in Colombia?  A brewer (the Santo Domingo Group, the owner of Bavaria).  The richest in Argentina?  A brewer (the Bembergs, owners of Quilmes).  These guys can’t all be geniuses… It’s the business that must be good.

3G always set high goals.  When they achieved one ambitious goal, then they would set the next one.  They were never satisfied.  When 3G took over Brahma, the first goal was to be the best brewer in Brazil.  The next goal was to be the best brewer in the world.

3G has always had a truly long-term vision:

Marcel Telles spent considerable time building Brahma, with a longer-term vision.  The company spent a decade improving the efficiency of its operations and infusing it with the Garantia culture.  When the culture was in place, a large talent pipeline was developed, so that the company could acquire its largest rival, Antarctica.  By taking their time in building the culture of the company, management was ensuring that the culture could sustain itself well beyond the 3G partners’ tenure.  This long-term vision remains intact and can be observed in a statement from AB InBev’s 2014 annual report:  ‘We are driven by our passion to create a company that can stand the test of time and create value for our shareholders, not only for the next ten or twenty years but for the next one hundred years.  Our mind-set is truly long term.’

3G’s philosophy of innovation was similar to a venture capitalist approach.  Ten people would be given a small amount of capital to try different things.  A few months later, two out of ten would have good ideas and so they would get more funding.

Here are the first five commandments (out of eighteen) that Lemann created at Garantia:

  • A big and challenging dream makes everyone row in the same direction.
  • A company’s biggest asset is good people working as a team, growing in proportion to their talent, and being recognized for that. Employee compensation has to be aligned with shareholders’ interests.
  • Profits are what attract investors, people, and opportunities, and keep the wheels spinning.
  • Focus is of the essence. It’s impossible to be excellent at everything, so concentrate on the few things that really matter.
  • Everything has to have an owner with authority and accountability. Debate is good, but in the end, someone has to decide.

Garantia had an incentive system similar to that created by other intelligent fanatics.  Base salary was below market average.  But high goals were set for productivity and costs.  And if those goals are achieved, bonuses can amount to many times the base salaries.

The main metric that employees are tested against is economic value added – employee performance in relation to the cost of capital.  The company’s goal is to achieve 15% economic value added, so the better the company performs as a whole, the larger is the bonus pool to be divided among employees.  And, in a meritocratic culture, the employees with the best results are awarded the highest bonuses.

Top performers also are given a chance to purchase stock in the company at a 10% discount.

The 3G partners believe that a competitive atmosphere in a business attracts high-caliber people who thrive on challenging one another.  Carlos Brito said, ‘That’s why it’s important to hire people better than you.  They push you to be better.’



Cassel and Iddings quote Warren Buffett’s 2010 Berkshire Hathaway shareholder letter:

Our final advantage is the hard-to-duplicate culture that permeates Berkshire.  And in businesses, culture counts.

One study found the following common elements among outperformers:

What elements of those cultures enabled the top companies to adapt and to sustain performance?  The common answers were the quality of the leadership, the maintenance of an entrepreneurial environment, prudent risk taking, innovation, flexibility, and open communication throughout the company hierarchy.  The top-performing companies maintained a small-company feel and had a long-term horizon.  On the other hand, the lower-performing companies were slower to adapt to change.  Interviewees described these companies as bureaucratic, with very short-term horizons.

Cassel and Iddings discuss common leadership attributes of intelligent fanatics:

Leading by Example

Intelligent fanatics create a higher cause that all employees have the chance to become invested in, and they provide an environment in which it is natural for employees to become heavily invested in the company’s mission.

…At Southwest, for example, the company created an employee-first and family-like culture where fun, love, humor, and creativity were, and continue to be, core values.  Herb Kelleher was the perfect role model for those values.  He expressed sincere appreciation for employees and remembered their names, and he showed his humor by dressing up for corporate gatherings and even by settling a dispute with another company through an arm wrestling contest.

Unblemished by Industry Dogma

Industries are full of unwritten truths and established ways of thinking.  Industry veterans often get accustomed to a certain way of doing or thinking about things and have trouble approaching problems from a different perspective.  This is the consistency and commitment bias Charlie Munger has talked about in his speech ‘The Psychology of Human Misjudgment.’  Succumbing to the old guard prevents growth and innovation.

…All of our intelligent fanatic CEOs were either absolute beginners, with no industry experience, or had minimal experience.  Their inexperience allowed them to be open to trying something new, to challenge the old guard.  The CEOs developed new ways of operating that established companies could not compete with.  Our intelligent fanatics show us that having industry experience can be a detriment.

Teaching by Example

Jim Sinegal learned from Sol Price that ‘if you’re not spending ninety percent of your time teaching, you’re not doing your job.’

Founder Ownership Creates Long-Term Focus

The only way to succeed in dominating a market for decades is to have a long-term focus.  Intelligent fanatics have what investor Tom Russo calls the capacity to suffer short-term pain for long-term gain…. As Jeff Bezos put it, ‘If we have a good quarter, it’s because of work we did three, four, five years ago.  It’s not because we did a good job this quarter.’  They build the infrastructure to support a larger business, which normally takes significant up-front investment that will lower profitability in the short term.

Keep It Simple

Jorge Paulo Lemann:

All the successful people I ever met were fanatics about focus.  Sam Walton, who built Walmart, thought only about stores day and night.  He visited store after store.  Even Warren Buffett, who today is my partner, is a man super focused on his formula.  He acquires different businesses but always within the same formula, and that’s what works.  Today our formula is to buy companies with a good name and to come up with our management system.  But we can only do this when we have people available to go to the company.  We cannot do what the American private equity firms do.  They buy any company, send someone there, and constitute a team.  We only know how to do this with our team, people within our culture.  Then, focus is also essential.

Superpower of Incentives

Intelligent fanatics are able to create systems of financial incentive that attract high-quality talent, and they provide a culture and higher cause that immerses employees in their work.  They are able to easily communicate the why and the purpose of the company so that employees themselves can own the vision.

…All of this book’s intelligent fanatic CEOs unleashed their employees’ fullest potential by getting them to think and act as owners.  They did this two ways:  they provided a financial incentive, aligning employees with the actual owners, and they gave employees intrinsic motivation to think like owners.  In every case, CEOs communicated the importance of each and every employee to the organization and provided incentives that were simple to understand.


Intelligent fanatics and their employees are unstoppable in their pursuit of staying ahead of the curve.  They test out many ideas, like a scientist experimenting to find the next breakthrough.  In the words of the head of Amazon Web Services (AWS), Andy Jassy, ‘We think of (these investments) as planting seeds for very large trees that will be fruitful over time.’

Not every idea will work out as planned.  Jeff Bezos, the founder and CEO of Amazon, said, ‘A few big successes compensate for dozens and dozens of things that did not work.’  Bezos has been experimenting for years and often has been unsuccessful…

Productive Paranoia

Jim Collins describes successful leaders as being ‘paranoid, neurotic freaks.’  Although paranoia can be debilitating for most people, intelligent fanatics use their paranoia to prepare for financial or competitive disruptions.  They also are able to promote this productive paranoia within their company culture, so the company can maintain itself by innovating and preparing for the worst.

Decentralized Organizations

Intelligent fanatics focus a lot of their mental energy on defeating bureaucracies before they form.

…Intelligent fanatics win against internal bureaucracies by maintaining the leanness that helped their companies succeed in the first place… Southwest was able to operate with 20% fewer employees per aircraft and still be faster than its competitors.  It took Nucor significantly few workers to produce a ton of steel, allowing them to significantly undercut their competitors’ prices.

Dominated a Small Market Before Expanding

Intelligent fanatics pull back on the reins in the beginning so they can learn their lessons while they are small.  Intelligent fanatic CEOs create a well-oiled machine before pushing the accelerator to the floor.

Courage and Perseverance in the Face of Adversity

Almost all successful people went through incredible hardship, obstacles, and challenges.  The power to endure is the winner’s quality.  The difference between intelligent fanatics and others is perseverance…

Take, for instance, John Patterson losing more than half his money in the Southern Coal and Iron Company, or Sol Price getting kicked out of FedMart by Hugo Mann.  Herb Kelleher had to fight four years of legal battles to get Southwest Airlines’ first plane off the ground.  Another intelligent fanatic, Sam Walton, got kicked out of his first highly successful Ben Franklin store due to a small clause in his building’s lease and had to start over.  Most people would give up, but intelligent fanatics are different.  They have the uncanny ability to quickly pick themselves up from a large mistake and move on.  They possess the courage to fight harder than ever before…



Intelligent fanatics demonstrate the qualities all employees should emulate, both within the organization and outside, with customers.  This allows employees to do their jobs effectively, by giving them autonomy.  All employees have to do is adjust their internal compass to the company’s true north to solve a problem.  Customers are happier, employees are happier, and if you make those two groups happy, then shareholders are happier.

…Over time, the best employees rise to the top and can quickly fill the holes left as other employees retire or move on.  Employees are made to feel like partners, so the success of the organization is very important to them.  Partners are more open to sharing new ideas or to offering criticism, because their net worth is tied to the long-term success of the company.

Companies with a culture of highly talented, driven people continually challenge themselves to offer best-in-class service and products.  Great companies are shape-shifters and can maneuver quickly as they grow and as the markets in which they compete change.



An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.


If you are interested in finding out more, please e-mail me or leave a comment.

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Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

CASE STUDY: Verde AgriTech (AMHPF)

(Image: Zen Buddha Silence, by Marilyn Barbone)

January 2, 2022

Verde AgriTech (AMHPF) is an agri-tech company founded in 2005 by Cristiano Veloso.  Veloso comes from a family of farmers.  He is highly educated and intellectually curious.

Verde owns the first Brazilian potash mine in 33 years.  Brazil imports 94% of its potash.  Verde is the lowest cost potash producer—its cost is $170 per ton of potash—for two mains reasons:

    • Because Verde produces its potash in Brazil, that makes it lower cost than most potash producers who exist outside of Brazil and have to pay additional shipping costs;
    • Verde’s production process does not use any water or chemicals, and no tailings dams or waste generation is needed.  The company’s deposit is at the surface, while most potash mines are deep.

Because Verde is the lowest cost producer, it has a sustainable competitive advantage that should allow it to earn high margins—and high return on invested capital—for many years.

Furthermore, traditional potash has high salinity and is therefore bad for the biodiversity of the soil.  The world uses 61.5 million tons of potassium chloride each year, which is equivalent to 460 billion liters of bleach.

Verde’s product—K Forte—is a salinity and chloride free potassium specialty fertilizer.  Verde produces K Forte by using the naturally occurring glauconite in the Alto Paranaiba region in the state of Minas Gerais in Brazil.  Whereas traditional potash contains potassium and chlorine, K Forte contains potassium, silicon, magnesium, and manganese. As a result, K Forte is better for the soil and leads to healthier plants and ultimately healthier food.  K Forte also improves the carbon capture capacity of the soil.  The company’s mission: “Our purpose is to improve the health of people and the planet.”

Verde currently has only Plant 1 running.  It is maxed out at 400,000 tons per year (tpy).  The company has already maxed out Plant 1’s production.  Plant 2 is expected to start producing in Q3 2022 and it will be able to produce 800,000 tpy.  Plant 3 will be even larger.

Potash prices could remain high for much of 2022.  See:

More importantly, potash prices could be high for much of the next decade if it turns out to be a commodities bull market.  See:

The current market cap of AMHPF is $110.57 million, while the stock price is $2.20.  The enterprise value (EV) is $114.47 million.  Assuming that production is maxed out for Plants 1 and 2, that would be 1,200,000 tpy.  Assuming a potash price of $400, that would be $66.67 per ton ($400 for 6 tons of K Forte).  Revenue would be $80.00 million.

Operating cost per ton is $28.33 ($170 for 6 tons of K Forte).  So operating costs would be $34.00 million.  That means operating profit would be $46.00 million.  Net profit would be $41.00 million.  EBITDA would be $47.00 million.  (That puts the EBITDA margin at 58.8%.  If potash prices are higher, the EBITDA margin can reach 70-80%.)   Operating cash flow can be estimated at $47.00 million.

Using these figures, we get the following multiples:

    • EV/EBITDA = 2.44
    • P/E = 2.70
    • P/B = 1.76
    • P/CF = 2.35
    • P/S = 1.38

Also note that the NAV of the company—based on its glauconite resources and on the fact that the total Brazilian market for potash is 20 million tpy—is $49.77 per share in Canadian dollars or $38.82 per share in U.S. dollars.

The CEO Cristiana Veloso owns 20% of the shares.  Also, he has been adamant about not using shares to fund growth.  For the construction of its Plant 2, the company is using $3.75 million in debt and $1.41 million in internally generated cash flows.

On the most recent quarterly call, Veloso commented on the triple digit growth: “Blitzscaling is never an easy endeavour, but I’m confident we have built the right team to continue succeeding at this challenge.  It is still day 1 at Verde.”

The company board includes people like Alysson Paolinelli, a professor, former minister of agriculture, and a World Food Prize winner.

Verde AgriTech has a Piotroski F_Score of 7, which is good.

Net debt is low:  Cash is $2.4 million.  Debt is $2.8 million.  TL/TA is 30%, which is good.

Intrinsic value scenarios:

    • Low case: Assume $400 per ton for potash prices—the current price is over $700—and that plant 2 is delayed.  In this scenario, revenue could be $27 million and net profit $5 million.  With a P/E of 15, the stock would trade at $1.49, which is 32% below today’s $2.20.
    • Mid case: Assume $400 per ton for potash prices—the current price is over $700.  With plant 1 and plant 2 producing, production would be 1,200,000 tpy.  That translates into $80 million in revenue and $41 million in net profit.  The company should have at least a P/E of 15.  That would put the intrinsic value of the stock at $12.24, which is over 450% higher than today’s $2.20.
    • High case: Assume $400 per ton for potash prices—the current price is over $700.  With plant 1 and plant 2 producing, production would be 1,200,000 tpy.  That translates into $80 million in revenue and $41 million in net profit.  The company should have at least a P/E of 25 because of its significant growth potential.  That would put the intrinsic value of the stock at $20.39, which is over 825% higher than today’s $2.20.
    • Very high case:  NAV per share—based on the company’s glauconite resources and on the size of the Brazilian market—is $38.82.  That is over 1,660% higher than today’s $2.20.  In other words, a 16-bagger.  (Note that the company has 777.28 million tons of glauconite reserves, enough to supply most of the Brazilian market for decades.)


The biggest risks are market adoption risk, currency risk, political risk, and commodity price risk.

So far, farmers are adopting Verde’s products, as evidenced by the sold out production.

The Brazilian real seems to be fairly stable at $0.18 per U.S. dollar.  But if there is a flight to safety during a bear market or recession, the Brazilian real would decline versus the U.S. dollar.

One political risk is that their application for the license needed to start Plant 2 in Q3 2022 won’t be approved in time.  Another political risk is government corruption and the lack of growth-oriented reforms.

There is a risk that the price of potash could fall significantly.  This seems unlikely, given double digit inflation in many parts of the world.  It seems to be a commodity bull market.  It’s even possible that potash prices will remain at $600-800 per ton, which would mean huge profits for Verde Agritech as long as it can fully increase its production as planned.



An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.




Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

CASE STUDY: Research Solutions (RSSS)

(Image: Zen Buddha Silence, by Marilyn Barbone)

January 2, 2022

Research Solutions has a program called Article Galaxy which gives researchers in the scientific, technical, and medical field unlimited access to articles for the price of $10,649 a year.  It’s an outstanding value for many researchers, who otherwise have to pay $4,000 to $6,000 for each article.  Article Galaxy users are growing rapidly at 30% to 40% a year.

Research Solutions aims to be “The Bloomberg for Scientific, Technical, and Medical Research.”  RSSS has a strong competitive position because it offers such a great value proposition to those who sign up for Article Galaxy.  Article Galaxy also integrates with other software and automatically gathers new content of interest.

The company provides excellent customer service.  They listen carefully to their customers—both criticism and applause—and often they implement requested features.

A great value proposition plus excellent customer service means there is low churn plus an ability to upsell often.

In brief, Research Solutions has a strong competitive position that should allow it to continue growing rapidly and to earn a high ROIC (return on invested capital) for decades.

Because customers pay upfront, while the company pays its expenses throughout the year, Research Solutions has a negative cash conversion cycle.  Free cash flow grows as new customers sign up, while capital does not need to be kept or raised in order to fund growth.  (As far as fixed assets, it’s just a leased office space plus computers.)

Article Galaxy generates gross margins over 80%.  Gross profit from new sales translates almost entirely to free cash flow because the marginal cost of new users is much less than their lifetime value.

Management believes the total addressable market (TAM) for Article Galaxy is 700,000 users.  Management ultimately aims to capture 4% of the TAM, which is 28,000 users.

RSSS currently has 590 users of Article Galaxy.  Assume that the number of users grows 35% a year for the next six years.  Then there would be over 3,500 users in six years (still only 0.5% of the TAM).

Assume the price for Article Galaxy in six years is $12,500 (representing CAGR—compound annual growth rate—of 3.3%).  Assume gross margins stay at 80%+ and gross profits from legacy transactions are $6 million.  The tax rate is 28%.

Then we get the following figures in six years:  Revenue will be $43.75 million, EBITDA will be $25.25 million, net income will be $18.18 million, and operating cash flow will be $25.25 million.

The current market cap is $65.78 million, while enterprise value (EV) is $55.63 million.

This gives us the following multiples in six years:

    • EV/EBITDA = 2.20
    • P/E = 3.62
    • P/B = 3.29
    • P/CF = 2.61
    • P/S = 1.50

The current Piotroski F_Score is 7, which is good.

The founder of Research Solutions and executive chairman of the board is Peter Derycz.  Derycz owns 15.1% of the stock.  Management, directors, and employees own 7.9%.  So total insider ownership is 23%, which is excellent.

Cash is $10.9 million, while debt is zero.  TL/TA is 67.7%, which is fine because there is high cash and no debt.

Intrinsic value scenarios

    • Low case: Although users of Article Galaxy have been growing at 30% to 40% a year, growth may slow to 10% a year.  In this case, the stock would be worth $1.33, which is 46% lower than today’s $2.46.  (There also could be a bear market during which most stocks decline 40% to 50%.  But in this case, stocks would bounce back eventually.)
    • Mid case: Users of Article Galaxy will probably grow at 35% a year for the next six years.  That would put the number of users of Article Galaxy at 3,500+.  (That is still only 0.5% of the TAM of 700,000.)  In this scenario, for a very high-quality growing business, I assume the P/E should be at least 22.  That puts the intrinsic value of the stock at $12.49 six years from now.  That is over 400% higher than today’s $2.46.  The CAGR—compound annual growth rate—of the stock over six years would be 31.1%.
    • High case: Assume that users of Article Galaxy grow at 30% a year for the next ten years.  That would put the number of users of Article Galaxy at close to 8,000, but let’s say 7,000, which is still only 1% of the TAM of 700,000.  In this scenario, the intrinsic value of the stock would be $27.21 ten years from now.  That is over 1,000% higher than today’s $2.46.  In other words, a 10-bagger.  The CAGR of the stock over ten years would be 27.2%.
    • Very high case: Assume that the users of Article Galaxy grow at close to 30% a year for the next fifteen years.  That would put the total number of users of Article Galaxy at 28,000+.  This is 4% of the TAM of 700,000, which Research Solutions has as a target in its most recent investor presentation (November, 2021).  In this scenario, the intrinsic value of the stock would be $130.60 fifteen years from now.  That is over 5,200% higher than today’s $2.46.  In other words, a 50-bagger.  The CAGR of the stock over fifteen years would be 30.3%.


One risk is sites that offer free access to scientific articles illegally.  But this hasn’t been a problem so far for Research Solutions.  Many outstanding organizations are already clients of Research Solutions and customer feedback is quite positive.  (When the feedback is negative, RSSS listens carefully and tries to improve accordingly.)  People in the scientific, technical, and medical community are less piracy-prone than most.

Another risk would be open-source journals that make content freely available.  This hasn’t been a problem yet for Research Solutions.  But it’s important to keep an eye on this.



An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.




Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

Ten Attributes of Great Investors

(Image:  Zen Buddha Silence by Marilyn Barbone.)

December 26, 2021

Michael Mauboussin is the author of several excellent books, including More Than You Know and Think Twice.  I wrote about these books here:

He has also written numerous papers, including Thirty Years: Reflections on the Ten Attributes of Great Investors

When it comes to value investing, Mauboussin is one of the best writers in the world.  Mauboussin highlights market efficiency, competitive strategy analysis, valuation, and decision making as chief areas of focus for him the past couple of decades.  Mauboussin:

What we know about each of these areas today is substantially greater than what we did in 1986, and yet we have an enormous amount to learn.  As I like to tell my students, this is an exciting time to be an investor because much of what we teach in business schools is a work-in-progress.

(Image by magele-picture)

Here are the Ten Attributes of Great Investors:

  • Be numerate (and understand accounting).
  • Understand value (the present value of free cash flow).
  • Properly assess strategy (or how a business makes money).
  • Compare effectively (expectations versus fundamentals).
  • Think probabilistically (there are few sure things).
  • Update your views effectively (beliefs are hypotheses to be tested, not treasures to be protected).
  • Beware of behavioral biases (minimizing constraints to good thinking).
  • Know the difference between information and influence.
  • Position sizing (maximizing the payoff from edge).
  • Read (and keep an open mind).



Mauboussin notes that there are two goals when analyzing a company’s financial statements:

  • Translate the financial statements into free cash flow.
  • Determine how the competitive strategy of the company creates value.

The value of any business is the future free cash flow it will produce discounted back to the present.

(Photo by designer491)

Free cash flow is cash earnings minus investments that must be made to grow future earnings.  Free cash flow represents what owners of the business receive.  Warren Buffett refers to free cash flow as owner earnings.

Earnings alone cannot give you the value of a company.  You can grow earnings without growing value.  Whether earnings growth creates value depends on how much money the company invests to generate that growth.  If the ROIC (return on invested capital) of the company’s investment is below the cost of capital, then the resulting earnings growth destroys value rather than creates it.

After calculating free cash flow, the next goal in financial statement analysis is to figure out how the company’s strategy creates value.  For the company to create value, the ROIC must exceed the cost of capital.  Analyzing the company’s strategy means determining precisely how the company can get ROIC above the cost of capital.

Mauboussin writes that one way to analyze strategy is to compare two companies in the same business.  If you look at how the companies spend money, you can start to understand competitive positions.

Another way to grasp competitive position is by analyzing ROIC.

Photo by stanciuc

You can break ROIC into two parts:

  • profitability (net operating profit after tax / sales)
  • capital velocity (sales / invested capital)

Companies with high profitability but low capital velocity are using a differentiation strategy.  Their product is positioned in such a way that the business can earn high profit margins.  (For instance, a luxury jeweler.)

Companies with high capital velocity but low profitability have adopted a cost leadership strategy.  These businesses may have very thin profit margins, but they still generate high ROIC because their capital velocity is so high.  (Wal-Mart is a good example.)

Understanding how the company makes money can lead to insight about how long the company can maintain a high ROIC (if ROIC is high) or what the company must do to improve (if ROIC is low).




Great fundamental investors focus on understanding the magnitude and sustainability of free cash flow.  Factors that an investor must consider include where the industry is in its life cycle, a company’s competitive position within its industry, barriers to entry, the economics of the business, and management’s skill at allocating capital.

It’s worth repeating: The value of any business (or any financial asset) is the future free cash flow it will produce discounted back to the present.  Successful investors understand the variables that impact free cash flow.

Illustration by OpturaDesign



Mauboussin says this attribute has two elements:

  • How does the company make money?
  • Does the company have a sustainable competitive advantage, and if so, how durable is it?

To see how a business makes money, you have to figure out the basic unit of analysis.  Mauboussin points out that the basic unit of analysis for a retailer is store economics:  How much does it cost to build a store?  What revenues will it generate?  What are the profit margins?

Regarding sustainable competitive advantage, Warren Buffett famously said:

The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.

If a company has a sustainable competitive advantage, then ROIC (return on invested capital) is above the cost of capital.  To assess the durability of that advantage, you have to analyze the industry and how the company fits in.  Looking at the five forces that determine industry attractiveness is a common step.  You should also examine potential threats from disruptive innovation.


Great investors can appreciate what differentiates a company that allows it to build an economic moat around its franchise that protects the business from competitors.  The size and longevity of the moat are significant inputs into any thoughtful valuation.

Bodiam Castle, Photo by valeryegorov

Buffett popularized the term economic moat to refer to a sustainable competitive advantage.  Here’s what Buffett said at the Berkshire annual meeting in 2000:

So we think in terms of that moat and the ability to keep its width and its impossibility of being crossed as the primary criterion of a great business.  And we tell our managers we want the moat widened every year.  That doesn’t necessarily mean the profit will be more this year than it was last year because it won’t be sometimes.  However, if the moat is widened every year, the business will do very well.




Perhaps the most important comparison an investor must make, and one that distinguishes average from great investors, is between fundamentals and expectations.  Fundamentals capture a sense of a company’s future financial performance.  Value drivers including sales growth, operating profit margins, investment needs, and return on investment shape fundamentals.  Expectations reflect the financial performance implied by the stock price.

Mauboussin mentions pari-mutuel betting, specifically horse racing.

(Photo by Elshaneo)

Fundamentals are how fast the horse will run, while expectations are the odds.

  • If a company has good fundamentals, but the stock price already reflects that, then you can’t expect to beat the market by investing in the stock.
  • If a company has bad fundamentals, but the stock price is overly pessimistic, then you can expect to beat the market by investing in the stock.

The best business in the world will not bring excess returns if the stock price already fully reflects the high quality of the business.  Similarly, a terrible business can produce excess returns if the stock price indicates that investors have overreacted.

To make money by investing in a stock, you have to have what great investor Michael Steinhardt calls a variant perception—a view at odds with the consensus view (as reflected in the stock price).  And you have to be right.

Mauboussin observes that humans are quick to compare but aren’t good at it.  This includes reasoning by analogy, e.g., asking whether a particular turnaround is similar to some other turnaround.  However, it’s usually better to figure out the base rate:  What percentage of all turnarounds succeed?  (Not a very high number, which is why Buffett quipped, “Turnarounds seldom turn.”)

Another limitation of humans making comparisons is that people tend to see similarities when they’re looking for similarities, but they tend to see differences when they’re looking for differences.  For instance, Amos Tversky did an experiment in which the subjects were asked which countries are more similar, West Germany and East Germany, or Nepal and Ceylon?  Two-thirds answered West Germany and East Germany.  But then the subjects were asked which countries seemed more different.  Logic says that they would answer Nepal and Ceylon, but instead subjects again answered West Germany and East Germany.



Great investors are always seeking an edge, where the price of an asset misrepresents the probabilities or the outcomes.  By similar logic, great investors evaluate each investment decision based on the process used rather than based on the outcome.

  • A good investment decision is one that if repeatedly made would be profitable over time.
  • A bad investment decision is one that if repeatedly made would lead to losses over time.

However, a good decision will sometimes lead to a bad outcome, while a bad decision will sometimes lead to a good outcome.  Investing is similar to other forms of betting in that way.

Photo by annebel146

Furthermore, what matters is not how often an investor is right, but rather how much the investor makes when he is right versus how much he loses when he is wrong.  In other words, what matters is not batting average but slugging percentage.  This is hard to put into practice due to loss aversion—the fact that as humans we feel a loss at least twice as much as an equivalent gain.

There are three ways of determining probabilities.  Subjective probability is a number that corresponds with your state of knowledge or belief.  Mauboussin gives an example:  You might come up with a probability that two countries will go to war.  Propensity is usually based on the physical properties of the system.  If a six-sided die is a perfect cube, then you know that the odds of a particular side coming up must be one out of six.  Frequency is the third approach.  Frequency—also called the base rate—is measured by looking at the outcomes of a proper reference class.  How often will a fair coin land on heads?  If you gather all the records you can of a fair coin being tossed, you’ll find that it lands on heads 50 percent of the time.  (You could run your own trials, too, by tossing a fair coin thousands or millions of times.)

Often subjective probabilities are useful as long as you remain open to new information and properly adjust your probabilities based on that information.  (The proper way to update such beliefs is using Bayes’s theorem.)  Subjective probabilities are useful when there’s no clear reference class—no relevant base rate.

When you’re looking at corporate performance—like sales or profit growth—it’s usually best to look at frequencies, i.e., base rates.

An investment decision doesn’t have to be complicated.  In fact, most good investment decisions are simple.  Mauboussin quotes Warren Buffett:

Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain.  That is what we’re trying to do.  It’s imperfect, but that’s what it’s all about.

Buffett again:

Investing is simple, but not easy.



We have a strong preference for consistency when it comes to our own beliefs.  And we expect others to be consistent.  The problem is compounded by confirmation bias, the tendency to look for and see only information that confirms our beliefs, and the tendency to interpret ambiguous information in a way that supports our beliefs.  As long as we feel like our beliefs are both consistent and correct—and, as a default psychological setting, most of us feel this way most of the time—we’ll feel comfortable and we won’t challenge our beliefs.

Illustration by intheskies

Great investors seek data and arguments that challenge their views.  Great investors also update their beliefs when they come across evidence that suggests they should.  The proper way to update beliefs is using Bayes’s theorem.  To see Bayes’s theorem and also a clear explanation and example, see:


The best investors among us recognize that the world changes constantly and that all of the views that we hold are tenuous.  They actively seek varied points of view and update their beliefs as new information dictates.  The consequence of updated views can be action: changing a portfolio stance or weightings within a portfolio.  Others, including your clients, may view this mental flexibility as unsettling.  But good thinking requires maintaining as accurate a view of the world as possible.




Keith Stanovich, a professor of psychology, likes to distinguish between intelligence quotient (IQ), which measures mental skills that are real and helpful in cognitive tasks, and rationality quotient (RQ), the ability to make good decisions.  His claim is that the overlap between these abilities is much lower than most people think.  Importantly, you can cultivate your RQ.

Rationality is only partly genetic.  You can train yourself to be more rational.

Great investors relentlessly train themselves to be as rational as possible.  Typically they keep an investment journal in which they write down the reasoning for every investment decision.  Later they look back on their decisions to analyze what they got right and where they went wrong.

Great investors also undertake a comprehensive study of cognitive biases.  For a list of cognitive biases, see these two blog posts:

It’s rarely enough just to know about cognitive biases.  Great investors take steps—like using a checklist—designed to mitigate the impact that innate cognitive biases have on investment decision-making.

Photo by Kenishirotie



A stock price generally represents the collective wisdom of investors about how a given company will perform in the future.  Most of the time, the crowd is more accurate than virtually any individual investor.

(Illustration by Marrishuanna)

However, periodically a stock price can get irrational.  (If this weren’t the case, great value investors could not exist.)  People regularly get carried away with some idea.  For instance, as Mauboussin notes, many investors got rich on paper by investing in dot-com stocks in the late 1990’s.  Investors who didn’t own dot-com stocks felt compelled to jump on board when they saw their neighbor getting rich (on paper).

Mauboussin mentions the threshold model from Mark Granovetter, a professor of sociology at Stanford University.  Mauboussin:

Imagine 100 potential rioters milling around in a public square.  Each individual has a “riot threshold,” the number of rioters that person would have to see in order to join the riot.  Say one person has a threshold of 0 (the instigator), one has a threshold of 1, one has a threshold of 2, and so on up to 99.  This uniform distribution of thresholds creates a domino effect and ensures that a riot will happen.  The instigator breaks a window with a rock, person one joins in, and then each individual piles on once the size of the riot reaches his or her threshold.  Substitute “buy dotcom stocks” for “join the riot” and you get the idea.

The point is that very few of the individuals, save the instigator, think that rioting is a good idea.  Most would probably shun rioting.  But once the number of others rioting reaches a threshold, they will jump in.  This is how the informational value of stocks is set aside and the influential component takes over.

Great investors are not influenced much at all by the behavior of other investors.  Great investors know that the collective wisdom reflected in a stock price is usually right, but sometimes wrong.  These investors can identify the occasional mispricing and then make an investment while ignoring the crowd.



Great investors patiently wait for situations where they have an edge, i.e., where the odds are in their favor.  Many investors understand the need for an edge.  However, fewer investors pay much attention to position sizing.

If you know the odds, there’s a formula—the Kelly criterion—that tells you exactly how much to bet in order to maximize your long-term returns.  The Kelly criterion can be written as follows:

  • F = p – [q/o]


  • F = Kelly criterion fraction of current capital to bet
  • o = Net odds, or dollars won per $1 bet if the bet wins (e.g., the bet may pay 5 to 1, meaning you win $5 per each $1 bet if the bet wins)
  • p = probability of winning
  • q = probability of losing = 1 – p

The Kelly criterion has a unique mathematical property: if you know the probability of winning and the net odds (payoff), then betting exactly the percentage determined by the Kelly criterion leads to the maximum long-term compounding of capital.  (This assumes that you’re going to make a long series of bets.)  Betting any percentage that is not equal to that given by the Kelly criterion will inevitably lead to lower compound growth over a long period of time.

Mauboussin adds:

Proper portfolio construction requires specifying a goal (maximize sum for one period or parlayed bets), identifying an opportunity set (lots of small edge or lumpy but large edge), and considering constraints (liquidity, drawdowns, leverage).   Answers to these questions suggest an appropriate policy regarding position sizing and portfolio construction.

In brief, most investors are ineffective at position sizing, but great investors are good at it.



Great investors generally read a ton.  They also read widely across many disciplines.  Moreover, as noted earlier, great investors seek to learn about the arguments of people who disagree with them.  Mauboussin:

Berkshire Hathaway’s Charlie Munger said that he really liked Albert Einstein’s point that “success comes from curiosity, concentration, perseverance and self-criticism. And by self-criticism, he meant the ability to change his mind so that he destroyed his own best-loved ideas.”  Reading is an activity that tends to foster all of those qualities.

(Photo by Lapandr)

Mauboussin continues:

Munger has also said, “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time—none, zero.”  This may be hyperbolic, but seems to be true in the investment world as well.



An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.


If you are interested in finding out more, please e-mail me or leave a comment.

My e-mail:




Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

CASE STUDY: Journey Energy (JRNGF)

(Image: Zen Buddha Silence, by Marilyn Barbone)

December 12, 2021

It’s usually not possible to predict oil prices.  But oil prices have been relatively low on average since early 2015.

If oil prices remain high, then Journey Energy (JRNGF) will probably be a wonderful investment.



It appears probable that oil prices will be higher in the coming years, perhaps $65 to $75 a barrel (WTI) or more.  (If there is a recession, oil prices will likely drop temporarily before snapping back.)

Here is the best article I’ve seen on oil prices:

If the demand for jet fuel normalizes over the next 12 to 18 months, that will add approximately 1.5 million bpd (barrels per day) to oil demand.  Also, continued recovery in transportation is likely to add 500,000 bpd to oil demand.

Since 2012, global oil supply has increased by 10 million bpd.  6 million bpd has come from U.S. shale oil while 4 million bpd has come from OPEC.

Currently, U.S. shale oil production is at 7.5 million bpd, about 1.5 million bpd below its peak of 9 million barrels per day.  Because investors are demanding that U.S. shale oil production return more cash to shareholders—which it hasn’t done for most of the last 8+ year—U.S. shale oil production is likely to increase only 750,000 bpd in 2022.  Thus far, capex has been much lower than cash flow from operations.  And only the Permian basin has enough frac fleets to grow production.

Recently, OPEC+ agreed to increase production by 400,000 bpd each month starting in July 2021 and going through September 2022.  But so far, instead of adding the scheduled 1.6 million bpd, OPEC+ instead has only added 900,000 bpd.  With oil prices being high, OPEC+ members have every incentive to maximize their production.  They are not doing so because they cannot.  (For example, Angola is underproducing its quota by 250,o00 bpd, while Nigeria is underproducing its quota by 390,000 bpd.)

Meanwhile, the major producers in OPEC+ are not overproducing in order to make up for the deficit.  (Russia is overproducing its quota by 100,000 bpd, but other major producers in OPEC+ are not overproducing their quotas.)  Thus, the collective supply deficit from OPEC+ will keep growing.  It may turn out that OPEC+ is not able to achieve pre-pandemic production levels.

This situation has caused oil inventories to be 200 million barrels lower than pre-COVID levels.  The lower inventories fall, the more upward pressure on oil prices there is.  If oil inventories keep falling, then eventually the oil price will hit $100 per barrel (WTI).

Since it takes five years to develop a major oil project, there won’t be any material addition to oil supply from new projects for at least five years.

Of course, if there is a recession, oil prices will fall temporarily but then snap back.

As for long-term demand for oil, it’s likely to grow at least at 1% a year on average.  It may grow more than that as a result of all the fiscal and monetary stimuli in response to the COVID pandemic.  See this recent note from Bridgewater Associates, “It’s Mostly a Demand Shock, Not a Supply Shock, and It’s Everywhere”:

Also, longer term, the per capita oil consumption in China, India, Africa, and other countries nearby is a tiny fraction of the per capita oil consumption in the United States.  The transition away from fossil fuels is likely to take decades, and oil demand is likely to increase for at least 10 to 20 years.  If per capita oil consumption increases in China, India, Africa, and other countries nearby, that may make oil demand keep increasing even as western countries are working to reduce their oil demand.

Even if car manufacturers started making only all-electric vehicles today, oil demand would keep rising for many years, as Daniel Yergin points out in The New Map.

I am, of course, in favor of the transition to a post-fossil fuel economy.  But the global economy needs a lot of oil in order to make that transition over the next several decades.

The oil and gas industry will exist in close to its current form 10 or 20 years from now, as Jeremy Grantham has noted.  (As well, most oil companies do not have more than 15-20 years of reserves.)  The fact that some investors are no longer investing in oil and gas companies means that oil and gas stocks now have even higher expected returns.



Journey Energy (JRNGF) appears very cheap because of the recent increases in oil prices.

Normalized EBITDA is at least $60 million.  Normalized net income per share is at least $0.80.  Operating cash flow per share is least $1.10.  And normalized revenue is at least $132 million.  Whether the normalized figures are higher or lower depends mostly on oil prices.

The current market cap is $85.7 million, while the current enterprise value (EV) is $134.2 million.  The stock price is $1.73.

Using the normalized figures, here are the multiples:

    • EV/EBITDA = 2.23
    • P/E = 2.16
    • P/NAV = 0.69
    • P/CF = 1.57
    • P/S = 0.64

(We use P/NAV instead of P/B.  The NAV assumes $70 WTI.)

The Piotroski F_Score is 7, which is good.

In order to pay down debt, Journey Energy spent very little on capex in 2020 and 2021.  The company has $7.6 million in cash and $67.9 million in debt.  (Debt a year ago was $124.6 million.)  JRNGF plans to end 2021 with debt at $53 to $54 million.

In 2022, the company plans to spend $36 million on capex and $20 million on debt reduction, leading to a debt level of about $34 million at the end of 2022.

Currently, TL/TA is 76.0%.  This is high, but Journey Energy continues to rapidly pay down debt.

Insider ownership is 10%.  That is worth $8.5 million.  Insiders will make a good deal of money if the company does well.

For the intrinsic value scenarios, we calculate NAV based on 2P reserves (proved plus probable).

    • Low case: If the oil price averages $50 (WTI), then the stock may be worth half the current NAV ($2.50), which is $1.25.  That is 28% lower than today’s $1.73.
    • Mid case: If the oil price averages $70 (WTI), then NAV per share is $3.75.  That is over 210% higher than today’s $1.73.
    • High case: If the oil price averages $90 (WTI), then NAV per share is $6.25.  That is over 360% higher than today’s $1.73.



An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.




Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

CASE STUDY: Superior Gold (SUPGF)

(Image: Zen Buddha Silence, by Marilyn Barbone)

December 5, 2021


I should briefly mention a mistake that I made: Hummingbird Resources (HUMRF).  The Boole Microcap Fund established a position in October and November of 2020.  There is no question that the stock was quantitatively very cheap.  You can see my investment thesis at the time here:

HUMRF was in the top 50 stocks on our screen, meaning the top 2% out of more than two thousand companies that we ranked.

However, management has consistently over-promised and under-delivered.  Costs have been much higher than management forecasted and, even worse, they continue to escalate.  Production has usually been lower than forecasted.  The start of production at their main project, the Kouroussa gold mine, has repeatedly been pushed back.  Cash flows and earnings are deteriorating.  Debt is too high.  Debt is not going to come down much if costs continue to escalate.  Finally, their main producing mine is located in Mali, where there is significant political risk.

Looking back, there were four red flags that I missed:

    • Costs had been coming in much higher than management forecasted, and they generally kept increasing;
    • Production was usually lower than forecasted, while new projects kept being delayed;
    • Insider ownership was (and is) only 3%, which means management doesn’t really believe in the company’s potential.
    • The company’s main producing mine is in Mali, which is politically risky.

Of course, if gold prices rise, HUMRF may do very well.  But other gold miners may also do very well if gold prices rise.  If gold prices fall, HUMRF won’t do well at all, whereas some other gold miners will be relatively safe.



Superior Gold  is a Canadian gold producer that owns and operates 100% of the Plutonic Gold operations located in the world-class goldfields of Western Australia.

Superior Gold (SUPGF) has a market cap of $67 million.  With $20.5 million in cash and $11.5 million in debt, the enterprise value (EV), which is market cap plus debt minus cash, is $58 million.

SUPGF appears cheap:

    • EV/EBITDA = 2.80
    • P/E = 6.87
    • P/NAV = 0.42
    • P/CF = 2.91
    • P/S = 0.52

(I use P/NAV instead of P/B because P/NAV is more relevant.)

TL/TA is 60%.  But more than half of the liabilities are for mine rehabilitation, which will happen years in the future.  The lease obligation is $11.3 million.  The long-term debt is zero, while the cash balance is $20.5 million.  Thus, the company’s net debt is low.

The current Piotroski F-Score of Superior Gold is 7, which is good.

Including options, insider ownership is close to 4.5%.  That is worth over $3.5 million.  If the company executes on its plan, insiders could make $5 million to $15 million or more (depending upon gold prices).

The company keeps improving its reserves each quarter.

Moreover, Superior Gold is producing 75,000 ounces of gold a year and it is on its way to producing 100,000 ounces of gold a year.  By expanding to a second mill (which is low cost), SUPGF can produce at least 150,000 ounces of gold a year (and possibly much more if the grade is high enough).

Ultimately, Superior Gold aims to return to mid-tier producer status by producing 200,000+ ounces of gold a year.  Increasing from 150,000 ounces to 200,000+ ounces will likely require smart exploration.

Superior Gold’s main challenge has been high costs.  But the new CEO Chris Jordaan is doing an outstanding job implementing a solid plan to reduce costs.

Intrinsic value scenarios:

    • Low case:  The gold price may decline.  NAV per share is $1.31.  The company may be worth half that, which is $0.65.  That is 20% higher than today’s $0.54.
    • Mid case:  If the gold price stays above $1,500, then the company is probably worth NAV, which is $1.31 per share.  That is over 140% higher than today’s $0.54.
    • High case:  If the gold price exceeds $2,000, then Superior Gold could be worth $3.00 a share or more.  That is over 450% higher than today’s $0.54.



An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.


If you are interested in finding out more, please e-mail me or leave a comment.

My e-mail:




Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.