Boole Microcap Fund

June 15, 2025

Warren Buffett, the world’s greatest investor, earned the highest returns of his career from microcap cigar butts. Buffett wrote in the 2014 Berkshire Letter:

My cigar-butt strategy worked very well while I was managing small sums. Indeed, the many dozens of free puffs I obtained in the 1950’s made the decade by far the best of my life for both relative and absolute performance.

Even then, however, I made a few exceptions to cigar butts, the most important being GEICO. Thanks to a 1951 conversation I had with Lorimer Davidson, a wonderful man who later became CEO of the company, I learned that GEICO was a terrific business and promptly put 65% of my $9,800 net worth into its shares. Most of my gains in those early years, though, came from investments in mediocre companies that traded at bargain prices. Ben Graham had taught me that technique, and it worked.

But a major weakness in this approach gradually became apparent: Cigar-butt investing was scalable only to a point. With large sums, it would never work well…

Before Buffett led Berkshire Hathaway, he managed an investment partnership from 1957 to 1970 called Buffett Partnership Ltd. (BPL). While running BPL, Buffett wrote letters to limited partners filled with insights (and humor) about investing and business. Jeremy C. Miller has written a great book– Warren Buffett’s Ground Rules (Harper, 2016)–summarizing the lessons from Buffett’s partnership letters.

This blog post considers a few topics related to microcap cigar butts:

• Net Nets
• Dempster: The Asset Conversion Play
• Liquidation Value or Earnings Power?
• Mean Reversion for Cigar Butts
• Focused vs. Statistical
• The Rewards of Psychological Discomfort
• Conclusion

 

NET NETS

Here Miller quotes the November 1966 letter, in which Buffett writes about valuing the partnership’s controlling ownership position in a cigar-butt stock:

…Wide changes in the market valuations accorded stocks at some point obviously find reflection in the valuation of businesses, although this factor is of much less importance when asset factors (particularly when current assets are significant) overshadow earnings power considerations in the valuation process…

Ben Graham’s primary cigar-butt method was net nets. Take net current asset value minus ALL liabilities, and then only buy the stock at 2/3 (or less) of that level. If you buy a basket (at least 20-30) of such stocks, then given enough time (at least a few years), you’re virtually certain to get good investment results, predominantly far in excess of the broad market.

A typical net-net stock might have $30 million in cash, with no debt, but have a market capitalization of $20 million. Assume there are 10 million shares outstanding. That means the company has $3/share in net cash, with no debt. But you can buy part ownership of this business by paying only $2/share. That’s ridiculously cheap. If the price remained near those levels, you could effectively buy $1 million in cash for $667,000–and repeat the exercise many times.

Of course, a company that cheap almost certainly has problems and may be losing money. But every business on the planet, at any given time, is in either one of two states: it is having problems, or it will be having problems. When problems come–whether company-specific, industry-driven, or macro-related–that often causes a stock to get very cheap.

The key question is whether the problems are temporary or permanent. Statistically speaking, many of the problems are temporary when viewed over the subsequent 3 to 5 years. The typical net-net stock is so extremely cheap relative to net tangible assets that usually something changes for the better–whether it’s a change by management, or a change from the outside (or both). Most net nets are not liquidated, and even those that are still bring a profit in many cases.

The net-net approach is one of the highest-returning investment strategies ever devised. That’s not a surprise because net nets, by definition, are absurdly cheap on the whole, often trading below net cash–cash in the bank minus ALL liabilities.

Buffett called Graham’s net-net method the cigar-butt approach:

…I call it the cigar-butt approach to investing. You walk down the street and you look around for a cigar butt someplace. Finally you see one and it is soggy and kind of repulsive, but there is one puff left in it. So you pick it up and the puff is free – it is a cigar butt stock. You get one free puff on it and then you throw it away and try another one. It is not elegant. But it works. Those are low return businesses.

Link: http://intelligentinvestorclub.com/downloads/Warren-Buffett-Florida-Speech.pdf

(Photo by Sky Sirasitwattana)

When running BPL, Buffett would go through thousands of pages of Moody’s Manuals (and other such sources) to locate just one or a handful of microcap stocks trading at less than liquidation value. Other leading value investors have also used this technique. This includes Charlie Munger (early in his career), Walter Schloss, John Neff, Peter Cundill, and Marty Whitman, to name a few.

The cigar-butt approach is also called deep value investing. This normally means finding a stock that is available below liquidation value, or at least below net tangible book value.

When applying the cigar-butt method, you can either do it as a statistical group approach, or you can do it in a focused manner. Walter Schloss achieved one of the best long-term track records of all time–near 21% annually (gross) for 47 years–using a statistical group approach to cigar butts. Schloss typically had a hundred stocks in his portfolio, most of which were trading below tangible book value.

At the other extreme, Warren Buffett–when running BPL–used a focused approach to cigar butts. Dempster is a good example, which Miller explores in detail in his book.

 

DEMPSTER: THE ASSET CONVERSION PLAY

Dempster was a tiny micro cap, a family-owned company in Beatrice, Nebraska, that manufactured windmills and farm equipment. Buffett slowly bought shares in the company over the course of five years.

(Photo by Digikhmer)

Dempster had a market cap of $1.6 million, about $13.3 million in today’s dollars, says Miller.

• Note: A market cap of $13.3 million is in the $10 to $25 million range–among the tiniest micro caps–which is avoided by nearly all investors, including professional microcap investors.

Buffett’s average price paid for Dempster was $28/share. Buffett’s estimate of liquidation value early on was near $35/share, which is intentionally conservative. Miller quotes one of Buffett’s letters:

The estimated value should not be what we hope it would be worth, or what it might be worth to an eager buyer, etc., but what I would estimate our interest would bring if sold under current conditions in a reasonably short period of time.

To estimate liquidation value, Buffett followed Graham’s method, as Miller explains:

• cash, being liquid, doesn’t need a haircut
• accounts receivable are valued at 85 cents on the dollar
• inventory, carried on the books at cost, is marked down to 65 cents on the dollar
• prepaid expenses and “other” are valued at 25 cents on the dollar
• long-term assets, generally less liquid, are valued using estimated auction values

Buffett’s conservative estimate of liquidation value for Dempster was $35/share, or $2.2 million for the whole company. Recall that Buffett paid an average price of $28/share–quite a cheap price.

Even though the assets were clearly there, Dempster had problems. Stocks generally don’t get that cheap unless there are major problems. In Dempster’s case, inventories were far too high and rising fast. Buffett tried to get existing management to make needed improvements. But eventually Buffett had to throw them out. Then the company’s bank was threatening to seize the collateral on the loan. Fortunately, Charlie Munger–who later became Buffett’s business partner–recommended a turnaround specialist, Harry Bottle. Miller:

Harry did such an outstanding job whipping the company into shape that Buffett, in the next year’s letter, named him “man of the year.” Not only did he reduce inventories from $4 million to $1 million, alleviating the concerns of the bank (whose loan was quickly repaid), he also cut administrative and selling expenses in half and closed five unprofitable branches. With the help of Buffett and Munger, Dempster also raised prices on their used equipment up to 500% with little impact to sales volume or resistance from customers, all of which worked in combination to restore a healthy economic return in the business.

Miller explains that Buffett rationally focused on maximizing the return on capital:

Buffett was wired differently, and he achieves better results in part because he invests using an absolute scale. With Dempster he wasn’t at all bogged down with all the emotional baggage of being a veteran of the windmill business. He was in it to produce the highest rate of return on the capital he had tied up in the assets of the business. This absolute scale allowed him to see that the fix for Dempster would come by not reinvesting back into windmills. He immediately stopped the company from putting more capital in and started taking the capital out.

With profits and proceeds raised from converting inventory and other assets to cash, Buffett started buying stocks he liked. In essence, he was converting capital that was previously utilized in a bad (low-return) business, windmills, to capital that could be utilized in a good (high-return) business, securities.

Bottle, Buffett, and Munger maximized the value of Dempster’s assets. Buffett took the further step of not reinvesting cash in a low-return business, but instead investing in high-return stocks. In the end, on its investment of $28/share, BPL realized a net gain of $45 per share. This is a gain of a bit more than 160% on what was a very large position for BPL–one-fifth of the portfolio. Had the company been shut down by the bank, or simply burned through its assets, the return after paying $28/share could have been nothing or even negative.

Miller nicely summarizes the lessons of Buffett’s asset conversion play:

Buffett teaches investors to think of stocks as a conduit through which they can own their share of the assets that make up a business. The value of that business will be determined by one of two methods: (1) what the assets are worth if sold, or (2) the level of profits in relation to the value of assets required in producing them. This is true for each and every business and they are interrelated…

Operationally, a business can be improved in only three ways: (1) increase the level of sales; (2) reduce costs as a percent of sales; (3) reduce assets as a percentage of sales. The other factors, (4) increase leverage or (5) lower the tax rate, are the financial drivers of business value. These are the only ways a business can make itself more valuable.

Buffett “pulled all the levers” at Dempster…

 

LIQUIDATION VALUE OR EARNINGS POWER?

For most of the cigar butts that Buffett bought for BPL, he used Graham’s net-net method of buying at a discount to liquidation value, conservatively estimated. However, you can find deep value stocks–cigar butts–on the basis of other low “price-to-a-fundamental” ratio’s, such as low P/E or low EV/EBITDA. Even Buffett, when he was managing BPL, used a low P/E in some cases to identify cigar butts. (See an example below: Western Insurance Securities.)

Tobias Carlisle and Wes Gray tested various measures of cheapness from 1964 to 2011. Quantitative Value (Wiley, 2012)–an excellent book–summarizes their results. James P. O’Shaughnessy has conducted one of the broadest arrays of statistical backtests. See his results in What Works on Wall Street (McGraw-Hill, 4^th edition, 2012), a terrific book.

(Illustration by Maxim Popov)

• Carlisle and Gray found that low EV/EBIT was the best-performing measure of cheapness from 1964 to 2011. It even outperformed composite measures.
• O’Shaughnessy learned that low EV/EBITDA was the best-performing individual measure of cheapness from 1964 to 2009.
• But O’Shaughnessy also discovered that a composite measure–combining low P/B, P/E, P/S, P/CF, and EV/EBITDA–outperformed low EV/EBITDA.

Assuming relatively similar levels of performance, a composite measure is arguably better because it tends to be more consistent over time. There are periods when a given individual metric might not work well. The composite measure will tend to smooth over such periods. Besides, O’Shaughnessy found that a composite measure led to the best performance from 1964 to 2009.

Carlisle and Gray, as well as O’Shaughnessy, didn’t include Graham’s net-net method in their reported results. Carlisle wrote another book, Deep Value (Wiley, 2014)–which is fascinating–in which he summarizes several tests of net nets:

• Henry Oppenheimer found that net nets returned 29.4% per year versus 11.5% per year for the market from 1970 to 1983.
• Carlisle–with Jeffrey Oxman and Sunil Mohanty–tested net nets from 1983 to 2008. They discovered that the annual returns for net nets averaged 35.3% versus 12.9% for the market and 18.4% for a Small Firm Index.
• A study of the Japanese market from 1975 to 1988 uncovered that net nets outperformed the market by about 13% per year.
• An examination of the London Stock Exchange from 1981 to 2005 established that net nets outperformed the market by 19.7% per year.
• Finally, James Montier analyzed all developed markets globally from 1985 to 2007. He learned that net nets averaged 35% per year versus 17% for the developed markets on the whole.

Given these outstanding returns, why didn’t Carlisle and Gray, as well as O’Shaughnessy, consider net nets? Primarily because many net nets are especially tiny microcap stocks. For example, in his study, Montier found that the median market capitalization for net nets was $21 million. Even the majority of professionally managed microcap funds do not consider stocks this tiny.

• Recall that Dempster had a market cap of $1.6 million, or about $13.3 million in today’s dollars.
• Unlike the majority of microcap funds, the Boole Microcap Fund does consider microcap stocks in the $10 to $25 million market cap range.

In 1999, Buffett commented that he could get 50% per year by investing in microcap cigar butts. He was later asked about this comment in 2005, and he replied:

Yes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I would do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today’s environment because information is easier to access. You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map–way off the map. You may find local companies that have nothing wrong with them at all. A company that I found, Western Insurance Securities, was trading for $3/share when it was earning $20/share!! I tried to buy up as much of it as possible. No one will tell you about these businesses. You have to find them.

Although the majority of microcap cigar butts Buffett invested in were cheap relative to liquidation value–cheap on the basis of net tangible assets–Buffett clearly found some cigar butts on the basis of a low P/E. Western Insurance Securities is a good example. It had a P/E of 0.15.

 

MEAN REVERSION FOR CIGAR BUTTS

Warren Buffett commented on high quality companies versus statistically cheap companies in his October 1967 letter to partners:

The evaluation of securities and businesses for investment purposes has always involved a mixture of qualitative and quantitative factors. At the one extreme, the analyst exclusively oriented to qualitative factors would say, “Buy the right company (with the right prospects, inherent industry conditions, management, etc.) and the price will take care of itself.” On the other hand, the quantitative spokesman would say, “Buy at the right price and the company (and stock) will take care of itself.” As is so often the pleasant result in the securities world, money can be made with either approach. And, of course, any analyst combines the two to some extent–his classification in either school would depend on the relative weight he assigns to the various factors and not to his consideration of one group of factors to the exclusion of the other group.

Interestingly enough, although I consider myself to be primarily in the quantitative school… the really sensational ideas I have had over the years have been heavily weighted toward the qualitative side where I have had a “high-probability insight”. This is what causes the cash register to really sing. However, it is an infrequent occurrence, as insights usually are, and, of course, no insight is required on the quantitative side–the figures should hit you over the head with a baseball bat. So the really big money tends to be made by investors who are right on qualitative decisions but, at least in my opinion, the more sure money tends to be made on the obvious quantitative decisions.

Buffett and Munger acquired See’s Candies for Berkshire Hathaway in 1972. See’s Candies is the quintessential high quality company because of its sustainably high ROIC (return on invested capital) of over 100%.

Truly high quality companies–like See’s–are very rare and difficult to find. Cigar butts are much easier to find by comparison.

Furthermore, it’s important to understand that Buffett got around 50% annual returns from cigar butts because he took a focused approach, like BPL’s 20% position in Dempster.

The vast majority of investors, if using a cigar-butt approach like net nets, should implement a group–or statistical–approach, and regularly buy and hold a basket of cigar butts (at least 20-30). This typically won’t produce 50% annual returns. But net nets, as a group, clearly have produced very high returns, often 30%+ annually. To do this today, you’d have to look globally.

As an alternative to net nets, you could implement a group approach using one of O’Shaughnessy’s composite measures–such as low P/B, P/E, P/S, P/CF, EV/EBITDA. Applying this to micro caps can produce 15-20% annual returns. Still excellent results. And much easier to apply consistently.

You may think that you can find some high quality companies. But that’s not enough. You have to find a high quality company that can maintain its competitive position and high ROIC. And it has to be available at a reasonable price.

Most high quality companies are trading at very high prices, to the extent that you can’t do better than the market by investing in them. In fact, often the prices are so high that you’ll probably do worse than the market.

Consider this observation by Charlie Munger:

The model I like to sort of simplify the notion of what goes o­n in a market for common stocks is the pari-mutuel system at the racetrack. If you stop to think about it, a pari-mutuel system is a market. Everybody goes there and bets and the odds change based o­n what’s bet. That’s what happens in the stock market.

Any damn fool can see that a horse carrying a light weight with a wonderful win rate and a good post position etc., etc. is way more likely to win than a horse with a terrible record and extra weight and so o­n and so on. But if you look at the odds, the bad horse pays 100 to 1, whereas the good horse pays 3 to 2. Then it’s not clear which is statistically the best bet using the mathematics of Fermat and Pascal. The prices have changed in such a way that it’s very hard to beat the system.

(Illustration by Nadoelopisat)

A horse with a great record (etc.) is much more likely to win than a horse with a terrible record. But–whether betting on horses or betting on stocks–you don’t get paid for identifying winners. You get paid for identifying mispricings.

The statistical evidence is overwhelming that if you systematically buy stocks at low multiples–P/B, P/E, P/S, P/CF, EV/EBITDA, etc.–you’ll almost certainly do better than the market over the long haul.

A deep value (cigar-butt) approach has always worked, given enough time. Betting on “the losers” has always worked eventually, whereas betting on “the winners” hardly ever works.

Classic academic studies showing “the losers” doing far better than “the winners” over subsequent 3- to 5-year periods:

• Werner De Bondt and Richard Thaler (1985), “Does the Stock Market Overreact?”:https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6261.1985.tb05004.x
• De Bondt and Thaler (1987), “Further Evidence on Investor Overreaction and Stock Market Seasonality”:https://www.jstor.org/stable/2328371?seq=1#page_scan_tab_contents
• Josef Lakonishok, Andrei Shleifer, and Robert Vishny (1994), “Contrarian Investment, Extrapolation, and Risk”: http://scholar.harvard.edu/files/shleifer/files/contrarianinvestment.pdf

That’s not to say deep value investing is easy. When you put together a basket of statistically cheap companies, you’re buying stocks that are widely hated or neglected. You have to endure loneliness and looking foolish. Some people can do it, but it’s important to know yourself before using a deep value strategy.

In general, we extrapolate the poor performance of cheap stocks and the good performance of expensive stocks too far into the future. This is the mistake of ignoring mean reversion.

When you find a group of companies that have been doing poorly for at least several years, those conditions typically do not persist. Instead, there tends to be mean reversion, or a return to “more normal” levels of revenues, earnings, or cash flows.

Similarly for a group of companies that have been doing exceedingly well. Those conditions also do not continue in general. There tends to be mean reversion, but in this case the mean–the average or “normal” conditions–is below recent activity levels.

Here’s Ben Graham explaining mean reversion:

It is natural to assume that industries which have fared worse than the average are “unfavorably situated” and therefore to be avoided. The converse would be assumed, of course, for those with superior records. But this conclusion may often prove quite erroneous. Abnormally good or abnormally bad conditions do not last forever. This is true of general business but of particular industries as well. Corrective forces are usually set in motion which tend to restore profits where they have disappeared or to reduce them where they are excessive in relation to capital.

With his taste for literature, Graham put the following quote from Horace’s Ars Poetica at the beginning of Security Analysis–the bible for value investors:

Many shall be restored that now are fallen and many shall fall than now are in honor.

Tobias Carlisle, while discussing mean reversion inDeep Value, smartly (and humorously) included this image of Albrecht Durer’s Wheel of Fortune:

(Albrecht Durer’s Wheel of Fortune from Sebastien Brant’s Ship of Fools (1494) via Wikimedia Commons)

 

FOCUSED vs. STATISTICAL

We’ve already seen that there are two basic ways to do cigar-butt investing: focused vs. statistical (group).

Ben Graham usually preferred the statistical (group) approach. Near the beginning of the Great Depression, Graham’s managed accounts lost more than 80 percent. Furthermore, the economy and the stock market took a long time to recover. As a result, Graham had a strong tendency towards conservatism in investing. This is likely part of why he preferred the statistical approach to net nets. By buying a basket of net nets (at least 20-30), the investor is virtually certain to get the statistical results of the group over time, which are broadly excellent.

Graham also was a polymath of sorts. He had wide-ranging intellectual interests. Because he knew net nets as a group would do quite well over the long term, he wasn’t inclined to spend much time analyzing individual net nets. Instead, he spent time on his other interests.

Warren Buffett was Graham’s best student. Buffett was the only student ever to be awarded an A+ in Graham’s class at Columbia University. Unlike Graham, Buffett has always had an extraordinary focus on business and investing. After spending many years learning everything about virtually every public company, Buffett took a focused approach to net nets. He found the ones that were the cheapest and that seemed the surest.

Buffett has asserted that returns can be improved–and risk lowered–if you focus your investments only on those companies that are within your circle of competence–those companies that you can truly understand. Buffett also maintains, however, that the vast majority of investors should simply invest in index funds:https://boolefund.com/warren-buffett-jack-bogle/

Regarding individual net nets, Graham admitted a danger:

Corporate gold dollars are now available in quantity at 50 cents and less–but they do have strings attached. Although they belong to the stockholder, he doesn’t control them. He may have to sit back and watch them dwindle and disappear as operating losses take their toll. For that reason the public refuses to accept even the cash holdings of corporations at their face value.

Graham explained that net nets are cheap because they “almost always have an unsatisfactory trend in earnings.” Graham:

If the profits had been increasing steadily it is obvious that the shares would not sell at so low a price. The objection to buying these issues lies in the probability, or at least the possibility, that earnings will decline or losses continue, and that the resources will be dissipated and the intrinsic value ultimately become less than the price paid.

(Image by Preecha Israphiwat)

Value investor Seth Klarman warns:

As long as working capital is not overstated and operations are not rapidly consuming cash, a company could liquidate its assets, extinguish all liabilities, and still distribute proceeds in excess of the market price to investors. Ongoing business losses can, however, quickly erode net-net working capital. Investors must therefore always consider the state of a company’s current operations before buying.

Even Buffett–nearly two decades after closing BPL–wrote the following in his 1989 letter to Berkshire shareholders:

If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the “cigar butt” approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the “bargain purchase” will make that puff all profit.

Unless you are a liquidator, that kind of approach to buying businesses is foolish. First, the original “bargain” price probably will not turn out to be such a steal after all. In a difficult business, no sooner is one problem solved than another surfaces–never is there just one cockroach in the kitchen. Second, any initial advantage you secure will be quickly eroded by the low return that the business earns. For example, if you buy a business for $8 million that can be sold or liquidated for $10 million and promptly take either course, you can realize a high return. But the investment will disappoint if the business is sold for $10 million in ten years and in the interim has annually earned and distributed only a few percent on cost…

Based on these objections, you might think that Buffett’s focused approach is better than the statistical (group) method. That way, the investor can figure out which net nets are more likely to recover instead of burn through their assets and leave the investor with a low or negative return.

However, Graham’s response was that the statistical or group approach to net nets is highly profitable over time. There is a wide range of potential outcomes for net nets, and many of those scenarios are good for the investor. Therefore, while there are always some individual net nets that don’t work out, a group or basket of net nets is nearly certain to work well eventually.

Indeed, Graham’s application of a statistical net-net approach produced 20% annual returns over many decades. Most backtests of net nets have tended to show annual returns of close to 30%. In practice, while around 5 percent of net nets may suffer a terminal decline in stock price, a statistical group of net nets has done far better than the market and has experienced fewer down years. Moreover, as Carlisle notes in Deep Value, very few net nets are actually liquidated or merged. In the vast majority of cases, there is a change by management, a change from the outside, or both, in order to restore earnings to a level more in line with net asset value. Mean reversion.

 

THE REWARDS OF PSYCHOLOGICAL DISCOMFORT

We noted earlier that it’s far more difficult to find a company like See’s Candies, at a reasonable price, than it is to find statistically cheap stocks. Moreover, if you buy a basket of statistically cheap stocks, you don’t have to possess an ability to analyze individual businesses in great depth.

That said, in order to use a deep value strategy, you do have to be able to handle the psychological discomfort of being lonely and looking foolish.

(Illustration by Sangoiri)

John Mihaljevic, author of The Manual of Ideas (Wiley, 2013), writes:

Comfort can be expensive in investing. Put differently, acceptance of discomfort can be rewarding, as equities that cause their owners discomfort frequently trade at exceptionally low valuations….

…Misery loves company, so it makes sense that rewards may await those willing to be miserable in solitude…

Mihaljevic explains:

If we owned nothing but a portfolio of Ben Graham-style bargain equities, we may become quite uncomfortable at times, especially if the market value of the portfolio declined precipitously. We might look at the portfolio and conclude that every investment could be worth zero. After all, we could have a mediocre business run by mediocre management, with assets that could be squandered. Investing in deep value equities therefore requires faith in the law of large numbers–that historical experience of market-beating returns in deep value stocks and the fact that we own a diversified portfolio will combine to yield a satisfactory result over time. This conceptually sound view becomes seriously challenged in times of distress…

Playing into the psychological discomfort of Graham-style equities is the tendency of such investments to exhibit strong asset value but inferior earnings or cash flows. In a stressed situation, investors may doubt their investment theses to such an extent that they disregard the objectively appraised asset values. After all–the reasoning of a scared investor might go–what is an asset really worth if it produces no cash flow?

Deep value investors often find some of the best investments in cyclical areas. A company at a cyclical low may have multi-bagger potential–the prospect of returning 300-500% (or more) to the investor.

Mihaljevic comments on a central challenge of deep value investing in cyclical companies:

The question of whether a company has entered permanent decline is anything but easy to answer, as virtually all companies appear to be in permanent decline when they hit a rock-bottom market quotation. Even if a business has been cyclical in the past, analysts generally adopt a “this time is different” attitude. As a pessimistic stock price inevitably influences the appraisal objectivity of most investors, it becomes exceedingly difficult to form a view strongly opposed to the prevailing consensus.

Consider the following industries that have been pronounced permanently impaired in the past, only to rebound strongly in subsequent years: Following the financial crisis of 2008-2009, many analysts argued that the banking industry would be permanently negatively affected, as higher capital requirements and regulatory oversight would compress returns on equity. The credit rating agencies were seen as impaired because the regulators would surely alter the business model of the industry for the worse following the failings of the rating agencies during the subprime mortgage bubble. The homebuilding industry would fail to rebound as strongly as in the past, as overcapacity became chronic and home prices remained tethered to building costs. The refining industry would suffer permanently lower margins, as those businesses were capital-intensive and driven by volatile commodity prices.

 

CONCLUSION

Buffett has made it clear, including in his 2014 letter to shareholders, that the best returns of his career came from investing in microcap cigar butts. Most of these were mediocre businesses (or worse). But they were ridiculously cheap. And, in some cases like Dempster, Buffett was able to bring about needed improvements when required.

When Buffett wrote about buying wonderful businesses in his 1989 letter, that’s chiefly because investable assets at Berkshire Hathaway had grown far too large for microcap cigar butts.

Even in recent years, Buffett invested part of his personal portfolio in a group of cigar butts he found in South Korea. So he’s never changed his view that an investor can get the highest returns from microcap cigar butts, either by using a statistical group approach or by using a more focused method.

 

BOOLE MICROCAP FUND

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: https://boolefund.com/best-performers-microcap-stocks/

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 approachesintrinsic 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: jb@boolefund.com

 

 

 

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.

June 8, 2025

Investor Lee Freeman-Shor hired 45 of the world’s top investors and gave each between $20 million and $150 million to invest. He instructed each one to invest only in their ten best ideas. Freeman-Shor then examined the 1,866 investments made by this elite group over the course of June 2006 to October 2013. The result is the book,The Art of Execution: How the world’s best investors get it wrong and still make millions (2015).

Freeman-Shor explains that the best ideas of the best investors could reasonably be expected to generate excellent long-term results. Freeman-Shor:

These were ideas that they had significant confidence in, and were often the result of hundreds of hours of research by some of the smartest people on the planet.

Given all this, I was sure that I would make a lot of money.

It might surprise you, then, to be told that most of their investmentslost money.

Out of 1,866 investments, a total of 920–about 49% of the total–made money.

However, almost all of these investors made money. How was this possible? Freeman-Shor studied every single trade in order to analyze what had happened.

Freeman-Shor quotes Leo Melamed, a successful futures trader:

I could be wrong 60% of the time and come out a big winner. The key is money management.

Paul Tudor Jones:

The reason for all the Wall Street success stories he knew was down to: money management, money management, money management.

George Soros:

It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.

Here’s the outline for the book:

PART I. I’M LOSING (WHAT SHOULD I DO?)

• • The Rabbits: Caught in the Capital Impairment
  • The Assassins: The Art of Killing Losses
  • The Hunters: Pursuing Losing Shares

PART II. I’M WINNING (WHAT SHOULD I DO?)

• • The Raiders: Snatching at Treasure
  • The Connoisseurs: Enjoying Every Last Drop

CONCLUSION: THE HABITS OF SUCCESS

THE WINNER’S CHECKLIST

1. 1. Best ideas only
   2. Position size matters
   3. Be greedy when winning
   4. Materially adapt when you are losing
   5. Only invest in liquid stocks

THE LOSER’S CHECKLIST

1. 1. Invest in lots of ideas
   2. Invest a small amount in each idea
   3. Take small profits
   4. Stay in an investment idea and refuse to adapt when losing
   5. Do not consider liquidity

 

PART I. I’M LOSING–WHAT SHOULD I DO?

The Rabbits: Caught in the Capital Impairment

Freeman-Shor remarks that the Rabbits ended up being the least successful investors working for him, despite the fact that these were all prestigious investors.

Freeman-Shor gives a case study: Vyke Communications, a UK-based company that specialized in software that allowed users to make phone calls and send text messages. The investor bought shares on October 31, 2007 at £2.10. When the price fell, the investor bought more. This was the right move if the investor still believed in the idea. However, the stock kept falling and the investor decided to stay invested. Two and a half years later on July 2, 2010, the investor sold the entire position at £0.02, for a 99% loss.

Another case study: Vostok Nafta, an investment company listed on the Swedish stock exchange that invests in assets in the Commonwealth of Independent States, a loose associtaion of some of the countries that used to make up the USSR. This investor bought shares April 11, 2008, at £9.14. Five months later, he sold at £3.95, for a loss of 57%. Freeman-Shor notes that the only reason the investor sold was because Free-Shor was pressuring him to either buy more or sell.

Yet another case study: Raymarine, a company that specializes in marine electronics. An investor bought shares on May 31, 2007, at £4.27. 23 months later the price had collapsed, but the investor still believed in the idea. Eventually, partly due to pressure, the investor sold his entire position on April 15, 2009, at £0.17. This was a loss of 96%.

Where did the Rabbits go wrong? Freeman-Shor states ten reasons for why the Rabbits failed:

(1) The narrative fallacy framing bias

Framing bias, discovered by Amos Tversky and Daniel Kahneman, means that people tend to reach a conclusion based on the way a problem is presented. In the case of the Rabbits, they allowed their favorite types of investment to influence how they viewed the stock in question. The Rabbits still believed in the investment thesis for a stock that had fallen a great deal and so they still believed they would make money going forward. Freeman-Shor:

The Rabbits are a great example of how professional investors often react to a black-swan event–an event they did not anticipate and which has negatively impacted their investment story. They tend to dismiss it.

(2) Primacy error

Primacy error means that first impressions have a lasting and disproportional effect on a person. Because the Rabbits had a very positive first impression, they failed to update their investment thesis to incorporate new information.

(3) Anchoring

Related to primacy error is anchoring. Rabbits tended to anchor to initial information, being very slow to change their minds. Freeman-Shor:

It took one Rabbit two and a half years to change his mind on Vyke, and another Rabbit almost two years to react to Raymarine’s decline. The other never changed his mind on Vostok. Similar stubbornness occurred on many other investments.

(4) Endowment bias

As humans, we tend to overvalue our own possessions, which includes the investments we’ve made.

When there are large losses that happen quickly, they are almost impossible to accept. It’s easier to hold on to a losing position. Rabbits did not want to admit the loss by selling because they were too fixated on what they had paid for the stock.

(5) The pull of the crowd

There were many other investors who got burned on the same investments that the Rabbits got burned on. This could have contributed further to the Rabbits being unable to admit their error and sell. Freeman-Shor quotes John Maynard Keynes:

It is the long-term investor… who will in practice come in for most criticism… if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.

(6) Ego

Freeman-Shor says that the Rabbits were more interested in being right than in making money. Many professional investors are this way.

The Rabbits simply could not admit that they were wrong. Freeman-Shor observes:

The fact is, the greatest minds on the planet can be wrong. My findings suggest you should expect to be wrong at least half of the time. The very best investment minds are!

(7) Self-attribution bias

Self-attribution bias means that we blame others or external factors for our misfortunes but take full credit when things go well. This is why we tend not to learn from past mistakes, but to keep repeating them.

The Rabbits, writes Freeman-Shor, tended to blame Mr. Market (“The market is being stupid”) or Mr. Unlucky (“It wasn’t muy fault, I was unlucky because of XYZ that no one could have foreseen”).

(8) The wrong information

Freeman-Shor:

Because many of the Rabbits had been professionally investing for a couple of decades, controlling a significant amount of assets, they had Rolodexes to die for. When they found the ‘story’ behind an investment being challenged, they liked nothing better than picking up the phone and dialling the CEO on his or her personal number to get to the bottom of things. Despite being reassured by the CEO that the setback was merely a bump in the road and the media was making a mountain out of a mole hill, the Rabbits would do nothing. They neither bought more shares nor sold their holdings.

A hugely appealing temptation for more information comes from the need to abrogate responsibility in times of crisis. It is very common when a difficult decision has to be made to see the decision-maker involving more people. The more people involved, the more they can relax because if it goes wrong it was not their fault.

(9) Too big to fail

Like many investors, Rabbits found it far more difficult to walk away from a large losing investment than a small losing investment.

(10) The gambler’s fallacy

The gambler’s fallacy is the mistaken belief that after a period of poor performance, a given stock was due to perform well.

Each coin toss in a series has a 50/50 chance of coming up heads and each toss is independent of prior tosses. The gambler’s fallacy ignores this and instead involves the belief that, after a series of tails, the next toss was likely to be heads. But there’s only a 50/50 chance of this because each toss is independent.

What could the Rabbits have done differently?

Freeman-Shor writes:

The bad news is, everyone can be a Rabbit. The good news is, no one needs to be. There are a few simple things they could have done to overcome their problems.

(1) Always have a plan.

Freeman-Shor:

Investing is all about probabilities. Whether you invest should depend on the odds and the edge you think you have. Given the odds and your edge you should know exactly what you are going to do if the stock you are investing in falls or rises by 20%, 50% and so on.

When faced with a painful loss-making position, most people do nothing. They turn into a Rabbit and procrastinate, letting all their biases play havoc with their decision-making, hoping time will resolve their issues so they don’t have to.

It’s essential to have a plan.

(2) Sell or buy more

Freeman-Shor:

The only solution to a losing situation is to sell out or significantly increase your stake.

Freeman-Shor says the investor needs to ask himself or herself a key question:

If I had a blank piece of paper and were looking to invest today, would I buy into that stock given what I now know?

If the answer is “no,” then the investor must sell. If the answer is “yes,” then the investor should significantly add to the position.

Freeman-Shor notes that legendary investor Peter Lynch would (i) sell if the fundamentals were worse but the price had increased or (ii) buy if the fundamentals were better but the price had decreased. This is logical.

The real mistake the Rabbits made was doing nothing when their investment had declined in price. The logical thing is either to admit a mistake and sell, or buy more at the lower price. Freeman-Shor:

I have learnt that I cannot trust great investors to do the right thing when they are losing–like top athletes, they require coaching and management.

(3) Don’t go all in

As an investor, you should always be able to add to an investment if the price falls, assuming you have taken a fresh look at the investment and decided it’s a good one at the new price. This means you don’t want one position to become too large. Freeman-Shor quotes Mohnish Pabrai:

In my own portfolios at Pabrai Funds, I adjust for this [getting the odds wrong] by simply placing bets at 10% of assets for each bet. It is suboptimal, but it takes care of the Bet 6 being superior to Bet 2 problem. Many times the bottom three to four bets outperform the ones I felt the best about.

(4) Don’t be hasty to jump in, do be hasty to jump out

Cutting your losses early makes excellent sense, although it is difficult. Freeman-Shor writes the following, ending with a quote from Ned Davis:

Not least because selling out of a stock helps clear your head and enables you to assess a situation more objectively. It’s like taking a decongestion pill when suffering from a cold.

And buying slowly over time (known as dollar or pound-cost averaging), with a reduced position size at the outset, ensures you have plenty of ammunition left to load up when a share finally capitulates (assuming it does).

“[W]hat separates the winners from the losers? The answer is simple–the winners makes small mistakes while the losers make big mistakes.”

(5) Remember there is a difference between ‘being right’ and ‘making money’

Freeman-Shor:

In investing, a lot of success can be attributed to being in the right place at the right time–otherwise known as luck.

(6) Seek out opposition

When people lose money they don’t want to be told they are wrong…

What you should really do is to speak to someone with an opposing view.

Ideally you should also sell out of the stock while you do that, so that you have removed the emotional attachment of a vested interest. This mitigates endowment bias and you can always buy the stock back later.

If you would not put money to work in a particular share today, knowing what you now know, then you have to concede that the investment is dead–and if you haven’t already sold, you absolutely should now.

(7) Be humble

Freeman-Shor notes that the Rabbits, on the whole, were incredibly smart and never said, “I don’t know.”

But this is a very dangerous mindset to have. First, it assumes the market is made up of buyers and sellers that are not equally expert, when in fact many will be. Second, ‘knowing more’ often leads to a person not seeing the wood for the trees.

Throughout history there have been many examples that demonstrate this. My favourites are Harry Warner, of Warner Bros., who in 1927 said, “Who the hell wants to hear actors talk?”, and Thomas Watson, chairman of IBM, who in 1943 said, “I think there is a world market for maybe five computers.”

Experts are surprisingly bad at forecasting. Falling for your own hype can also often lead to mistakes that the least intelligent person in the world would not be capable of. Warren Buffett, when talking about the collapse of Long-Term Capital Management, marvelled at “10 or 15 guys with an average IQ of maybe 170 getting themselves into a position where they can lose all their money.”

And crowds are often surprisingly wise–the market can be right even when everyone who makes it up is individually wrong.

Freeman-Shor mentions the jelly beans in a jar experiment. If you take a jar full of jelly beans and ask everyone in a room of 50 or 60 to guess at how many jelly beans are in the jar, typically the average guess is very close to the truth. Moreover, the best individual guess is often not even as good as the average guess, and of course there are many individual guesses that are wildly wrong. This experiment is analogous to the stock market.

Again, only 49% of the best ideas from some of the best investors–those Freeman-Shor hired–ended up being right.

(8) Keep quiet and carry on

Some investors make the mistake of talking publicly about their investments and their anticipated returns. This makes it much more difficult to change their minds if new facts warrant it.

(9) Don’t underestimate the downside–adapt to it

Many Rabbits like stocks that could shoot for the moon. However, often such stocks can get wiped out if they don’t work. Freeman-Shor suggests treating such stocks as options: Size the position as if it were an option–almost like a venture capital investment–so that, if it works, you can do well, whereas if it doesn’t work, the loss will be contained.

(10) Be open to different kinds of story

Deep value investing can produce the highest long-term returns. Freeman-Shor:

Many studies have shown that stocks with the worst stories tend to produce the highest returns.

Stated differently, value investing–investing in cheap stocks that no one likes because they have terrible stories that led to their stock price falling–produce the highest returns over time.

(11) Get sick of sick notes

Freeman-Shor suggests getting familiar with the typical excuses investors like to offer:

• • The ‘If only’ defence.
  • The ‘I would have been right but for’ defence.
  • The ‘It just hasn’t happened yet” defence.
  • The ‘Who could have foreseen at the time I invested that XYZ would happen…’ defence.
  • If it’s gone down this much already, it can’t go much lower.
  • You can always tell when a stock hits rock bottom.
  • Eventually they always come back.
  • When it rebounds slightly, I’ll sell.

(12) Be suspicious of status.

Freeman-Shor writes:

Lastly, whether you work in the investment industry or are thinking about trusting your money to someone who does, there is a bonus moral in the story of the Rabbits: it is dangerous to assume that just because an investment professional is highly educated and has years of experience, he or she will be good at making money and getting the big calls right.

IT’S ALL ABOUT CAPITAL IMPAIRMENT

Freeman-Shor says:

One of the reasons that the Rabbits held on to losing investments was fear of the unnkown: if they sold out, the shares might rally, and they would miss out. It was better to stick with a current loss than worry about that double-whammy.

This is known asambiguity aversion, and describes why people prefer to stick with intolerable situations merely because a hypothetical alternative might be worse. Better the devil you know.

Freeman-Shor again:

I believe that even the best investors often overlook the fact that a stock’s price would need a practically supernatural rise of 900% to break even if they have foolishly ridden it down 90% and done nothing.

THE LESSONS OF POKER

Freeman-Shor observes:

Stories are the biggest factor in determining what decisions we make. For the Rabbits, the stories in their heads led them to invest many millions in companies that ultimatley lost them and me vast amounts of money. Their actions post-investment were clouded by the story that led them to invest on day one.

The moral here is to try to avoid being blinded by your story. Above all, have aplan of action as to what you will do if you find yourself in a losing position, even if you still think you are right.

The key difference between the Rabbits and successful investors in this book is that when the Rabbits were losing they did nothing. As we will see with the Assassins and Hunters, they acted decisively to bail themselves out of the holes they found themselves in.

Freeman-Shor quotes Darwin:

It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.

Freeman-Shor then writes:

If only the Rabbits had played poker. Any poker player knows that it is not how many hands you win that matters, it’s how much you win when you win, and how much you lose when you lose.

Each hand in poker represents a story and the goal for a poker player is to try to make money with whatever story they have been given–good or bad. If the story is poor then you don’t stick with it and throw money at the problem; the odds are stacked against you. You fold your hand, cut your losses and live to fight another day.

Likewise, if you are dealt a good hand but then see the flop and realise the hand is now nowhere near as strong as you thought, you fold.

 

The Assassins: The Art of Killing Losses

Freeman-Shor quotes the legendary investor Warren Buffett’s rules for investing success:

Rule No. 1–Never lose money.

Rule No. 2–Never forget rule No.1.

Freeman-Shor then explains:

The Assassins are the investors who really lived and breathed this principle while working for me. When it came to selling losing positions so as to preserve their capital they were ruthless, like cold-hearted hitmen, pulling the trigger without emotion. Then they carried on with their lives like nothing had happened.

Hedge fund titan Stanley Druckenmiller had this to say about fellow hedge fund titan George Soros.

[He is] the best loss taker I have seen. He doesn’t care whether he wins or loses on a trade. If a trade doesn’t work, he’s confident enough about his ability to win on other trades that he can easily walk away from the position.

Freeman-Shor explains that successful investing is all about asymmetric returns:

…winning is about ensuring the upside return potential is significantly greater than the downside potential loss.

Despite that you might imagine, in reality we can all be as cold and ruthless as the Assassins.

Freeman-Shor adds:

What I liked about the Assassins was that they lived by a pair of sacred rules.

The rules were derived from their own experience and beliefs, and the key to their success was that when they were losing they would always let the rules, not their emotions or feelings, drive their decision.

They knew that when faced with the uncertainty that naturally follows when the market has turned against them, they could not rely on themselves to do the right thing.

They therefore committed to becoming slaves to the rules. When a loss occurred they would follow their commandments to the letter.

Importantly, these two rules had been well thought through when the Assassins were in an emotionally ‘cold state’. They planned well in advance; before they invested, they knew what they would do afterwards. They did this because they knew that when push came to shove they were likely to make poor decisions in a ‘hot’ (or emotionally charged) state of mind.

THE CODE OF THE ASSASSINS

(1) Kill all losers at 20-33%.

The Assassins know that it’s very tempting, when it comes time to kill a losing trade, to wait. That’s why they used a device: the stop-loss.Freeman-Shor:

The Assassins’ rules required them to put a stop-loss in place at the same time they they bought any share. If the stop-loss was triggered by a share price going down a certain amount, it automatically sold their entire stake.

Freeman-Shor comments that some investors use a “review” instead of a stop-loss, but that a stop-loss is often better. Freeman-Shor continues:

Legendary investor and art collector Roy Neuberger, whose investment firm Neuberger Berman bears his name, credits the 10% rule as part of the reason for his success. He always cuts his losses when they hit 10%–no matter what.Recognise your mistakes early and take immediate action was his mantra.

The Assassins’ rule was the same, but they despatched their losers at slightly different predetermined points depending on their own experience and preferences: almost always somewhere between 20% and 33% (it depended on the Assassin). Despite Neuberger’s rule, my findings support the Assassins’ approach. This range of stop-loss levels avoids you getting whipsawed while giving a realistic chance of being able to recover from the loss incurred.

Freeman-Shor offers a case study: Genmab, a Danish biotechnology company that specializes in creating human antibody treatments for people suffering from cancer. Two weeks after investing, the Assassin was down 30%. His stop-loss activated at -32% and he sold on Nvember 16, 2009, with the shares trading at £12.43, having originally bought the company on October 29, 2009, at £18.34. This was a good decision because the shares then fell another 49%. While it was tough to take a 30% loss so quickly, that was much better than a 65% loss.

Freeman-Shor gives another case study: Dods, a media company that provides information, organizes events, and does publishing. Dods had become the most trusted source for political data. An Assassin bought shares on December 29, 2006, at £0.51. Ten months later, his stop-loss at 39% sold out on October 31, 2007 at £0.31. After that, the stock fell another 63%. So the Assassin was clearly right to sell when his stop-loss had been triggered.

Freeman-Shor comments:

In the world of investments there is no such thing as a safe bet. If you invest in a company and think that it is bulletproof, I urge you to have an action plan to decide what to do when things go wrong–things often do.

The next case study: Royal Bank of Scotland. It is one of three banks in the UK that is permitted to issue UK banknotes. An Assassin bought shares on May 30, 2008, at £22.29. When the credit crisis started, this Assassin actually moved faster than his stop-loss, selling out at £18.62. This was a loss of 16%. The stock then lost a further 82%. Good decision by this assassin.

(2) Kill losers after a fixed amount of time.

Freeman-Shor explains the logic of this rule: Time is money.

Being in a losing position too long–even if the size of that loss hasn’t hit 20% or more–can have a devastating effect on your wealth. This was something the Assassins were acutely aware of.

DON’T SELL TOO SOON

While having a strict discipline for dealing with losing stocks is important, you don’t want to be overly strict or too quick.

Freeman-Shor gives the example of Compass Group, the world’s largest food service company. It serves billions of meals a year. One of the investors that Freeman-Shor manages bought on November 20, 2007 at £3.19. He then stold the entire stake twelve months later at £3.04, for a loss of only 5%. At the time Freeman-Shor was writing the book, the stock had already increased 143% since it was sold, which was more than the overall market increased.

Freeman-Shor offers the example of BMW. One of his investors bought BMW on April 11, 2008 at £34.95. He sold two months later on June 23, 2008, at a price of £32.35 for a loss of 7%. The stock then went up 95%.

Another example: Perelli, the Italian tyre manufacturer. One of Freeman-Shor’s investors bought on January 22, 2010 at £4.61. He sold one month later at £4.26, a loss of 8%. Perilli subsequently increased 103% as of the time Freeman-Shor was writing the book.

And: Rightmove, where people in the UK look for a property to rent or buy. One of Freeman-Shor’s investors bought shares at £5.51 on November 13, 2009. A month later, on December 30, 2009, he sold at a price of £4.91, a loss of 11%. The shares then shot up 202%.

BE CAREFUL ON YOUR NEXT INVESTMENT

When a person sells a losing investment, they often become risk-seeking, which is calledthe break-even effect. This is not a good idea.

AN ELUSIVE CADRE

Freeman-Shor writes:

The Assassins were some of the most disciplined investors I have met, and a significant factor in their ability to make money was that they cut their losses consistently. A study by Professor Frazzini supports the Assassins’ approach too: it shows that the highest investment returns were achieved by those investors that had the highest rate of selling out of losing positions. Those that realised the least amount of losing positions experienced the lowest returns.

The losing trait of riding losing positions while taking profits on winning positions has been called thedisposition effect by Frazzini.

 

The Hunters: Pursuing Losing Shares

Instead of using a stop-loss like the Assassins, the Hunters instead would–in certain situations–buy more of a stock that had decreased. Quite often, the Hunters would end up making a profit.

It’s important to note that the Hunters committed to buying more at lower prices–if they became available–before they even bought their initial stake. Freeman-Shor explains:

The key reason for the Hunters’ approach lay in their invariably contrarian style. They were value investors. They generally found themselves buying when everyone else was seling, and this was an extension of that philosophy, another way of exploiting Mr. Market when he was acting irrationally.

SUCCESS STARTS FROM FAILURE

Many successful Hunters had at least one terrible year near the beginning of their career. The Hunters learned how to be contrarian but also to be right more often than not. (Otherwise, there’s no benefit from being a contrarian.) Just as important, the Hunters learned to admit when they had made a mistake. Freeman-Shor:

They also grew unafraid to sell if it became clear they really had made a mistake. Poor value investors I have come across refuse to adapt when they are losing and tend to support their lack of action by saying, “I got it wrong but the stock is simply too cheap to sell now.” A bad contrarian investor can make for a very committed Rabbit.

But if a stock still passed the vital ‘Would I buy this knowing what I know now?’ test, the Hunters followed their plan, and started to put their money on the side to work as the share price dropped.

SNATCHING VICTORY

Many Hunters enjoyed the game of trying to pick a bottom in a given stock. It’s often not possible to do this, but sometimes it is possible to come close. As Freeman-Shor explains, successfully investing near the bottom can often create a nice profit. The Hunters enjoyed snatching victory from the jaws of defeat.

Freeman-Shor:

Be under no illusions: being a Hunter requires patience and discipline. You have to expect a share price to go against you in the near term and not panic when it does. You have to be prepared to make money from stocks that may never recapture the original price you paid for your first lost of shares. If you know your personality is one which demands instant gratification, this approach is not for you.

Freeman-Shor quote Peter Lynch:

I’m accustomed to hanging around with a stock when the price is going nowhere. Most of the money I make is in the third or fourth year that I’ve owned something.

Freeman-Shor offers some case studies.

Aker Solutions is a Norwegian oil services company. It provides products and services related to the construction, maintenance, and operation of oil and gas fields. One of Freeman-Shor’s Hunters bought the stock on April 14, 2008, at £15.84 per share. A year and a half later, the stock was much lower. The Hunter bought significantly more on September 28, 2009, so that his average cost was only £7.61. He sold at £9.58 because he realized his original thesis was no longer true. Had he not done anything, he would have had a loss of 40%. Instead, he made a 24% profit.

Experian is an Irish company that operates globally. The company collects information on individuals and produces credit scores used by lenders. A Hunter bought the stock on June 13, 2006, at an initial price of £9.02. After the price declined, the Hunter bought more, reducing his average cost to £5.66. When he sold at £7.06, he realized a profit of 19%. Had he done nothing, he would have lost 22%. Freeman-Shor notes that the Hunter, by his actions, had turned a losing position into a winning position.

Technip is a French company that does engineering and construction for the oil and gas industry. It’s a leader in areas such as subsea drilling, laying specially built pipelines, producing floating offshore platforms, and planning the development of oil and gas fields. A Hunter bought the stock on April 11, 2008, at a price of £55.42. When the stock declined, the Hunter bought much more, reducing his average cost to £42.24. He later sold at £52.13. He realized a gain of 22%. Once again, a Hunter had turned a loss into a gain by buying more shares on the decline.

Thomson Reuters is a global media company based on New York. It provides the latest content and data to the finance industry. It also produces material to help lawyers and accountants ensure they are up-to-date on the professional education. Moreover, the company produces research for the pharmaceutical industry. A Hunter bought stock on June 13, 2006, at £22.25. The stock dropped and the Hunter bought materially more, reducing his average cost to £15.82. He sold on September 10, 2009, at £18.92. Instead of a loss of 15%, the Hunter made a profit of 17%.

HUNTING FOR THE COMPOUNDING EFFECT

Freeman-Shor mentions the Kelly criterion. Freeman-Shor doesn’t mention the details, but they’re important, so here they are:

The Kelly criterion can be written as follows:

• • F = p – [q/o]

where

• • 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, assuming 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.

Both Warren Buffett and Charlie Munger are proponents of the essential logic of the Kelly criterion. Here’s Charlie Munger:

The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.

As for Buffett, he famously invested 40% of his hedge fund into American Express in the late 1960s. Buffett realized a large profit. Later, Buffett invested 25% of Berkshire Hathaway’s portfolio in Coca-Cola. Buffett again enjoyed a large profit of more than 10x (and counting).

Freeman-Shor notes the following:

If a stock you are invested in has fallen materially in price, but nothing else has changed–the investment thesis is still intact–your odds will have improved significantly and you should materially increase your stake in that company.

Freeman-Shor adds:

If you are a Hunter… you choose not to control risk by diversification but by thoroughly understanding the risk and returns of a particular stock or handful or stocks. Your goal is to find companies that have an unbelievably attractive, asymmetric payoff profile.

The fact that you are only investing in a few companies means that you have the opportunity to invest big on day one, and then follow up with large top-up investments should the share price fall.

Warren Buffett wrote in his 1993 letter to the shareholders of Berkshire Hathaway:

If you are a know-something investor, able to understand business economics and to find five to ten sensibly-priced companies that possess important long-term competitive advantages, conventional diversification make no sense for you. It is apt to simply hurt your results and increase your risk. I cannot understand why an investor of that sort elects to put money into a business that is his 20th favorite rather than simply adding that money to his top choices–the businesses he understands best and that present the least risk, along with the greatest profit potential.

Freeman-Shor concludes by pointing out that coaches would be quite helpful for investors:

I find it bizarre that top athletes and sportsmen and women have coaches but the majority of investment professionals do not.

How can they expect to improve their game if they do not have constructive feedback?

 

PART II. I’M WINNING–WHAT SHOULD I DO?

The Raiders: Snatching at Treasure

Freeman-Shor writes:

Raiders occupy a thin line between success and disaster. These are investors who like nothing better than taking a profit as soon as practical. They are the stock market equivalent of gold-age adventurers: having penetrated through the dense jungle, found the lost temple or buried treasure, they fill their pockts with all the ancient coins and gems they can–then turn tail and run.

Unlike gold-age adventurers, they are rarely chased by angry locals or rivals. The only boulders rolling after them are in their imaginations. They are terrified of getting caught and losing everything, and to ensure they at least come away with something end up leaving countless chests and swagbags of treasure behind completely unnecessarily.

Freeman-Shor continues:

I discovered the Raiders when I noticed the rather distressing fact that one of my investors had an incredible success rate–almost 70% of his ideas were correct, which is truly phenomenal–but he hadn’t made me any money.

I broke down the data for his investments and discovered that whenever he made a small gain, say 10%, he would immediately sell the stock and take the profit.

Interestingly, he was a hedge fund manager and in his own trading was an expert at shorting shares–and staying short. But when it came to long-only investments, he and the other Raiders lacked a key habit that the successful investors I worked with possessed. He did not embrace the right tail of the distribution curve. In ordinary terms, the Raiders did not run their winners.

Freeman-Shor then gives some examples.

Chicago Bridge & Iron is a multinational company that does energy industry infrastructure projects. One of the Raiders bought the stock on September 3, 2009, at £10.66. A month later, on October 5, 2009, he sold at £12.29. A few years later, the stock was at £30.38. The stock had increased 147% since the Raider had so prematurely sold it.

British American Tobacco manufactures and sells tobacco products, including the brands Lucky Strike, Pall Mall, Vogue, John Player, Benson & Hedges, and Kent. One of Freeman-Shor’s Raiders bought on July 3, 2009, at £19.96. Two and a half months later, on September 21, 2009, he sold at £21.75, a profit of 9%. A few years later, the stock was at £37.93, 74% higher than where the Raider had sold it.

Swedish Match is a world leader in chewable tobacco. The Raider bought on October 10, 2008, when the shares were at €10.56. This investor sold after two months on December 16, 2008, at €10.18, a 4% loss. He decided to buy back in on June 24, 2009, at €11.23, before selling on April 22, 2010, at €17.54, for a profit of 56%. A couple of years later, the stock was at €25.88, a further increase of 49%.

Novo Nordisk is a Danish pharmaceutical company and a world leader in diabetes medication (insulin) and care equipment (injection devices and needles). The company is also a leader in hemophilia care and hormone-replacement therapy. One of Freeman-Shor’s investors bought on April 22, 2009, at €35.71. He later sold on December 4, 2009, at €45.32, a profit of 27%. A couple of years later, the stock was at €124.92, a further increase of 175%. This Raider had made a huge error, assuming the intrinsic value of the stock was near €124.92 or higher.

Freeman-Shor summarizes by saying that Raiders are right most of the time, but still lose money because their losses are bigger than their gains. If they could learn to stick with winning ideas, they would be winning investors. Freeman-Shor comments:

…the most successful investors I worked with, those that made the most money, all had one thing in common: the presence of a couple of big winners in their portfolios. Any approach that does not embrace the possibility of winning big is doomed.

WHY DO INVESTORS SELL TOO SOON?

(1) It feels so good. Selling for a profit feels nice. We get a hit from testosterone and dopamine.

(2) I’m bored. As Peter Lynch observed:

[I]t’s normally harder to stick with a winning stock… than it is to believe in it after the price goes down.

(3) Frustration. It’s very difficult to patiently wait for years. One factor ishyperbolic discounting, which makes people prefer $1 today versus $2 tomorrow.

(4) Fear. Because ofloss aversion, we tend to feel the pain of a loss at least twice as much as the pleasure of an equivalent gain. When a Raider’s investment starts doing well, he often fears what might happen if he doesn’t sell.

(5) Short-termism. There isrecency bias. Freeman-Shor:

My own fund–the Old Mutual European Best Ideas fund–is a good example of this. If you took a three-year view from 2009 to 2011 you would have said I was a superstar. If you viewed my performance during August 2011, or for the year 2011 alone, you would have said quite the reverse.

The flows my fund experienced showed just this. Shortly after delivering those three-year performance figures I had over $200 million invested into my fund. But during August 2011, clients withdrew tens of millions of dollars.

Since 2011 the performance of the fund has been strong and, surprise surprise, we have attacted inflows again.

Imposing different time frames on an investment can produce very different results–and Raiders invariably impose short-term ones. This can be deadly for winning trades.

(6) Risk aversion. People are risk-averse when winning–and tend to take profits–and they are risk-seeking when losing. When winning, selling is appealing because the certainty of a small victory is better than the uncertainty of a loss or greater victory. When losing, risk is appealing because anything is better than a certain loss.

WHY YOU SHOULDN’T SELL EARLY

(1) Rarity value. Freeman-Shor:

All the successful investors I have managed made money because they won big in a few names, while ensuring the bad ideas did not materially hurt them.

… Stock market returns over time showkurtosis, which means fat tails are larger than would be expected from a normal distribution curve. This means that a few big winners and losers distort the overall market return–and an investor’s return. If you are not invested in those big winners your returns are drastically reduced.

(2) Beat your rivals. Honing your ability to let winners run can give you a very significant advantage as an investor.

(3) You cannot trust your next investment. The odds of picking a winning trade–based on the results of some of the best investors in the world working for Freeman-Shor–are roughly 49%. This means the odds of picking five winning investments in a row are roughly 2.8%. So if you have a winning investment, stick with it as long as possible.

(4) Winners can keep winning. The research says that a momentum strategy can be a winning strategy. A stock that has gone up over 6 months or a year often continues to go up. Of course, no stock goes up forever, so even though you should let a winner run–as long as the investment thesis is intact and the intrinsic value is higher than the current stock price–you should eventually sell unless it’s a company with a sustainably high return on equity (ROE).

(5) You can never predict big winners when you first invest. Freeman-Shor:

Many legendary investors did not predict their biggest winners–and have admitted it. Some all-time greats even built their investment style around not knowing how big a winner might be: Jesse Livermore became of of the wealthiest men in America in the 20th century by adopting a simple trend-following approach.

In effect he bought stocks that were being bid up and rode them up, never knowing if it would turn out to be a big winner when he initiated the position.

TOO PROFESSIONAL

Some reasons why professional investors tend to sell too soon.

(1) Bonuses. Many fund managers are paid an annual bonus. (It would make much more sense to pay a bonus–and allow the bonus to be large–every five or ten years.)

(2) Expectations. Some fund managers feel the outperformance cannot continue. The error being made is that essentially no investor can predict their biggest winners ahead of time. So it’s best to stick with a winner as long as the investment thesis is intact and the estimated intrinsic value is high enough (or the company has a sustainably high ROE).

(3) Forecasting. Often when fund managers look one or two years ahead and use conservative assumptions, the estimated intrinsic value is not much higher than the current stock price. This makes it difficult to stick with the big winners.

(4) Relativity. Unfortunately, many fund managers are evaluated on a shorter-term basis. This makes them obsess over shorter-term results. However, the biggest winners often increase the most in year 3 or year 4 or later. A fund manager worried about 6-month or 1-year performance will tend to miss the biggest winners.

Freeman-Shor writes:

So being assessed on a relative basis leads fund managers to pay alot of attention to how they are performing relative to both the benchmark index and their peer group. Worse still, some do this on a daily basis. They know the value of their holdings almost to the hour.

And it leads to a lot of unnecessary early selling. It helps professional investors think that stocks are riskier than they actually are. By monitoring a stock they are invested in several times a day, they notice the share price moves up and down quite a bit. The price seems volatile.

But what if you just reviewed an investment every ten years? You would probably find that the stock has made you quite a lot of money. Moreover, because you did not check the stock price during that ten-year period, you did not notice the price moving up and down every day. You never experienced the pain of a 20% fall in one day–perhaps 50% in a year. You were completely unaware of the volatility of the ride you were on. You therefore come to the conclusion that investing in the stock market is not risky at all.

My note: Fidelity did a study of its accounts and it found that the best-performing accounts belonged to people who either forgot they had an account or to people who had died.

 

The Connoisseurs: Enjoying Every Last Drop

Freeman-Shor writes:

The Connoisseurs are the last and most successful investment tribe I discovered among the top investors who worked for me. These are the investors whose performance lived up to the billing–or exceeded it. They did not get paralysed by unexpected losses or carried away with victories. They treated every investment like a vintage of wine: if it was off, they got rid of it immediately, but if it was good they knew it would only get better with age. They usually drank the odd bottle now and then, to tide them over–but otherwise they sat back and waited.

It takes a long of nerve to do nothing or merely trim a position when winning. Everything points to us being hard-wired to sell out of an investment when we have made a reasonable profit.

…

Taking small profits along the journey like a Connoisseur allows us to get instant gratification without ruining our long-term wealth aspirations. This ‘trick’ is one that I have seen in action and which allowed my best investors to stay in absolutely phenomenal winners.

HOW TO RIDE WINNERS

Freeman-Shor:

In terms of hit rate, as a group [Connoissers] actually had a worse record than the average for my investors. Six out of ten ideas the Connoisseurs invested in lost money. The trick was that when they won, they won big. They rode their winners far beyond most people’s comfort zone.

How to be like a Connoisseur:

(1) Find unsurprising companies.

The Connoisseurs’ approach was to identify companies with a view to holding them for ten or more years. They would buy businesses that they viewed as low ‘negative surprise’ companies. In other words, it was hard to envisage anything that could cause these companies to fail in generating profits over the years ahead.

Even if in the future they had terrible management at the helm, that management would have to be extraordinarily incompetent to destroy the profit-making ability of the enterprise. The companies were effectively money-printing machines.

The future growth of earnings was seen as very predictable, and because the Connoisseurs believed earnings growth drove stock prices, the stock price should therefore drift higher over time.

The main risk of buying these stocks was if they were rated highly at the outset (i.e. with high price/earnings ratio). This could mean that the company fundamentally performs as expected but the share price doesn’t follow earnings upwards due to it getting derated.

(2) Look for big upside potential. Where many investors go wrong is in investing in a lot of ideas with limited upside potential. Since your win rate may be between 40% and 49%, it’s essential to focus only on stocks with the biggest upside potential–or stocks trading at the greatest discount to intrinsic value.

(3) Invest big–and focused. Connoisseurs could end up with 50% of their portfolio in just two stocks. Freeman-Shor:

Having massive belief in a couple of names meant they were prepared to ride the stocks with big positions even when they were up 200% or more. Their success was testament to Stanley Druckenmiller’s comment that “position size can be more important than entry price.”

This is one of the reasons that I allow each of my current investors to invest up to 25% of the money I give them in a single idea.

Freeman-Shor quotes New Market Wizards:

When you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig. It takes courage to ride a profit with huge leverage. As far as Soros is concerned, when you’re right on something, you can’t own enough.

Freeman-Shor comments:

It is no use having a small investment in a big winner; you have to have a large position size to generate big returns.

(4) Don’t be scared. One key to sticking with a big winner and not being attracted by another great investment is to take small profits as the potential big winner is going up. But the bulk of the potential big winner should be maintained and not sold.

(5) Make sure you have a pillow. Freeman-Shor writes about having a high boredom threshold:

Meeting some of my Connoisseurs could be very, very boring because nothing ever changed. They would talk about the same stocks they had been invested in for the past five years or longer…

The fact is, most of us will find it difficult to emulate the Connoisseurs because we feel the need to do something when we get to the office (or home trading desk) every day. We look at stock price charts, listen to the latest market news on Bloomberg TV, and fool ourselves into believing we could add value from making a few small trades here and there. It is very hard to do nothing but focus on the same handful of companies every year, only researching new ideas on the side.

Many of us, seeing we have made a profit of 40% in one of our stocks, start actively looking for another company to invest the money into–instead of leaving it invested. This is precisely why lots of investors never become very successful.

Freeman-Shor next gives some real-life examples.

Shoprite Holdings is the largest food retailer in Africa. It also operates furniture outlets, fast food outlets, and pharmacies. It is the Wal-Mart of Africa. One of the Connoisseurs invested in Shoprite on May 20, 2009, at £3.96 per share. He sold the position three years later on August 9, 2012, at £13.10 per share. This was a return of 231% in only three years. This investor trimmed along the way and realized an overall profit of 104%.

Spirax-Sarco Engineering is a UK company that builds and maintains steam and industrial fluid plants. The company’s products–which include boilder and pipeline control valves and clean steam generators–are being used more and more. One of the Connoisseurs had known about this company for decades. He bought a position on November 30, 2007, at £9.63. He sold five years later on October 22, 2012, at £19.70. The Connoisseur trimmed along the way and so realized a profit of 70% by selling at an average price of £16.40.

Rotork is a UK-based business and the world’s leading manufacturer of valve actuators, whether electric, pneumatic, or hydraulic. The Connoisseur had known about the company for a long time. He bought a position on November 30, 2007, at £9.84. He sold five years later at £25.18. Because the investor took profits along the way, he realized an average selling price of £17.26, banking a profit of 74%.

President Chain Stores is a Taiwanese company. The company is an international food conglomerate operating in Taiwan and China. It’s similar to Wal-Mart. One of the Connoisseurs established a position on June 15, 2006, at £1.37 per share. He sold five years later on August 23, 2011, with the shares at £3.73. Because he trimmed along the way, the investor realized an average selling price of £3.17. This was a profit of 132%.

Kasikornbank is a commercial bank in Thailand. Through its wholly-owned subsidiaries, it does everything from investment banking to securities brokerage, fund management, hire purchase, and machinery/equipment leasing. A Connoiser initiated a position on June 20, 2008, at £1.09. He sold two years later on November 1, 2010, when the shares were at £2.65. Because the investor sold along the way, his average selling price was £1.88. Thus, he realized a profit of 79%.

Freeman-Shor writes an important point:

Remember, despite their successful approach, only one-in-three of the Connoisseurs’ ideas made money. In other words, every Connoisseur was also an Assassin or a Hunter when it came to losses.

CLUES FROM THEFORBES RICH LIST

Most people on the Forbes rich list not only have created a wonderful business, but also have never sold out. Many of these folks received buyout offers along the way, but they decided not to sell. Freeman-Shor:

Over the past decade or so, I would imagine Bezos has been approached by hundreds, possibly thousands of other companies wanting to buy Amazon from him. Could you have resisted if someone offered you $10m or $100m for your company? Resisting temptation and staying invested in a great idea is critical. Had Jeff sold out earlier when he was building Amazon, we may never have heard about him today.

Freeman-Shor adds:

When you are winning, dedication and discipline is what you require. The Pareto principle, otherwise known as the 80/20 rule, states that 80% of the effects come from 20% of the causes. It helps explain why great investors can be wrong most of the time and still make money. A few big winners make a massive difference to the eventual outcome.

WHY MANY FUND MANAGERS ARE DOOMED TO FAIL

Freeman-Shor writes that many fund managers find it nearly impossible to be Connoisseurs.

Firstly, many professional investors over-diversify when they invest because they are managing career risk. Most are judged by their bosses and employers based on how they perform against an index or peer group over ashort period of time. This militates against concentrating investments in potential long-term winners.

Secondly, regulators–based on investment theories from the 1970s–have put into place rules that prohibit professional fund managers from holding large positions in just a handful of their very best money-making ideas.

Why?

Because they believed diversified portfolios represent less risk than a concentrated portfolio of stocks. The reality, however, is that all you are doing is swapping one type of risk for another. You are exchanging company specific risk (idiosyncratic risk), which may be very low depending on the type of company you invest in, for market risk (systematic risk).

Risk hasn’t been reduced, it has been transferred.

The legendary investor Warren Buffett has written that if you know the companies you’re investing in very well and if you’ve focused only on your very best ideas, risk is actually lower than if you added more ideas about which you had both less conviction and less knowledge.

ACADEMIC SUPPORT FOR ‘BEST IDEAS’ INVESTING

There was a paper that looked at the performance of investment managers’ best ideas. They found:

• • The single highest-conviction stock of every manager taken together outperformed the market, as well as the other stocks in those managers’ portfolios, by approximately 1-4% a quarter. That is a staggering 4-16% a year. Over a ten-year time frame, that means these stocks could have outperformed the market by a phenomenal 48-341%!
  • The managers’ top five stocks also outperformed the market, as well as the other stocks in those managers’ portfolios, significantly.
  • The managers’ worst ideas–those stocks with the lowest weighting–performed significantly worse than the managers’ best ideas.

The study also found that there was little overlap in terms of the specific best ideas of the investors they studied. The bottom line: Success comes from investing inyour best idea.

The authors of the paper conclude:

What if each mutual fund manager had only to pick a few stocks, their best ideas? Could they outperform under those circumstances? We document strong evidence that they could, as the best ideas of the active managers generate up to an order of magnitude more alpha than their portfolio as a whole.

The paper also notes:

The poor overall performance of mutual fund managers in the past is not due to a lack of stock-picking ability, but rather to institutional factors that encourage them to over diversify, i.e. pick more stocks than their best alpha-generating ideas.

Again:

…the organization of the money management industry appears to make it optimal for managers to introduce stocks into their portfolios that are not outperformers… [in other words] managers attempt to maximise profits by maximizing assets under management… while investors benefit from concentration… managers under most commonly-used fee structures are better off with a more diversified portfolio.

DANGERS OF BEING A CONNOISSEUR

Freeman-Shor notes that while being a Connoisseur generates the highest returns, it is not easy and there are dangers, three in particular:

(1) You can be too late. After a stock has increased a greal deal, at some point it won’t and the investor may be too late. I would add: As long as the intrinsic value is higher than the current stock price, or as long as the ROE is sustainably high (if you’re buying a higher quality business as your value investment strategy) and the stock price reasonable, then you should be OK.

(2) Momentum can be illusory–and end abruptly. See the previous point.

One must also beware of bubbles. Freeman-Shor mentions the book by Charles Mackay,Extraordinary Popular Delusions and the Madness of Crowds (1841).

His research showed how people lose the ability to think rationally under pressures of crowd behavior. At the height of a bull market or in the depths of a bear market people become herd-minded.

…

This suggests that sipping some of those profits over time makes a lot of sense. While you stay invested and therefore have the potential to win big, you are mitigating the potential damage should the shares disappoint.

(3) You can get stuck. If panic takes over, it can be difficult to sell.

 

CONCLUSION: THE HABITS OF SUCCESS

Freeman-Shor writes:

Having had the privilege of investing over a billion dollars with the best investors in the world, and managing them on a daily basis for over eight years, my preconceptions about successful investors have been shattered.

I discovered that the success enjoyed by top investors is not due to possessing a special gift, nor from having a privileged upbringing (though some who worked for me did). Nor is it down to being born geniuses, though many were very smart. Instead, any success ultimately came down to just one thing: execution.

This was the common thread that connected all of them. And the secrets of successful execution were really just a matter of habit.

…

Each had learned the unseen art of executing ideas in a way that meant that even if they were wrong most of the time, they would still make a lot of money.

These successful investors didn’t have any clairvoyant forecasting abilities, but they knew what to do when they were winning or losing. Freeman-Shor:

If they were losing they knew they had to materially adapt, like a poker player being dealt a poor hand. A losing position was feedback from the market showing them that they were wrong to invest when they did. They knew that doing nothing, or a little, was futile. They had each independently developed a habit of significantly reducing or materially buying more shares when they were losing.

When winning, to take an analogy from baseball, the successful investors knew they had to try to hit a home run, as opposed to stealing first base. This meant that they had developed the hidden habit of being resolved to stay invested in a winning position even when inside they were burning to take the profits they had made, and their inner voice was screaming, ‘Take the profit before you lose it!’

Freeman-Shor adds the following:

Success in investing is open to anyone, whatever their level of education or background, whether old or young, experienced or inexperienced. You simply need to materially adapt when losing and remain faithful when winning.

If you have the discipline to do that, you can succeed.

I have no doubt that many professional investors reading this will neither change the way they invest nor adopt the winning habits I have revealed. They will consider them too simple or common. Most think they are just too smart and that they know best. They are overconfident in the same way all drivers think they are better than average. It’s their loss.

Freeman-Shor makes an additional, important point:

Some people may worry that adopting the habits of the successful investing tribes means losing their identity–or looking to invest with ideas that aren’t really theirs. The good news is that the investors within each group all had radically different opinions about almost everything. Their habits of execution overlapped, but the ideas that got them into an investment in the first place could not have been more different.

 

THE WINNER’S CHECKLIST: THE FIVE WINNING HABITS OF INVESTMENT TITANS

(1) BEST IDEAS ONLY. You should only invest in your very best ideas. Period. One or two big winners is essential for success.

(2) POSITION SIZE MATTERS. Again, it’s essential not to over-diversify. Invest only in your very best ideas. But have a handful of these ideas, not just one, because sometimes there are unforseen events or bad luck.

(3) BE GREEDY WHEN WINNING. You have to let your winners run. Embrace the possibility of the big win. Embrace the right tail, the statistical long shots, of the distribution curve. Give your investments the possibility of growing into ‘ten baggers.’

(4) MATERIALLY ADAPT WHEN YOU ARE LOSING. Either add significantly to a losing position or sell out. If you add more, you can turn a loser into a winner.

(5) ONLY INVEST IN LIQUID STOCKS. How liquid a stock is depends in part on how much you’re investing. If you’re investing $10 million or less, then most of the best investments will be microcap stocks.

 

THE LOSER’S CHECKLIST: THE FIVE LOSING HABITS OF MOST INVESTORS

(1) INVEST IN LOTS OF IDEAS. As noted earlier, Warren Buffett has pointed out that you should concentrate on your best ideas and that adding more ideas than that would onlyincrease risk anddecrease returns. Or as Charlie Munger said:

Wide diversification, which necessarily includes investment in mediocre businesses, only guarantees ordinary results.

(2) INVEST A SMALL AMOUNT IN EACH IDEA. This is related to the previous point. If you do not invest big in your best ideas, you won’t be able to do very well because a few big winners are what make the difference between an extraordinary track record and a mediocre one.

(3) TAKE SMALL PROFITS. If you sell too much of your best ideas before giving them a chance to really run, you are cutting off your best chance for excellent overall results.

(4) STAY IN AN INVESTMENT IDEA AND REFUSE TO ADAPT WHEN LOSING

(5) DO NOT CONSIDER LIQUIDITY

 

 

BOOLE MICROCAP FUND

An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.

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 approachesintrinsic 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: jb@boolefund.com

 

 

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.

May 25, 2025

I have now read The Education of a Value Investor, by Guy Spier, several times.  It’s a very honest and insightful description of Guy Spier’s evolution from arrogant and envious youth to kind, ethical, humble, and successful value investor in the mold of his heroes – including the value investors Mohnish Pabrai, Warren Buffett, and Charlie Munger.

Spier recounts how, after graduating near the top of his class at Oxford and then getting an MBA at Harvard, he decided to take a job at D. H. Blair, an ethically challenged place.  Spier realized that part of his job was to dress up bad deals.  Being unable to admit that he had made a mistake, Spier ended up tarnishing his reputation badly by playing along instead of quitting.

Spier’s story is about the journey “from that dark place toward the Nirvana where I now live.”

Besides the lesson that one should never do anything unethical, Spier also learned just how important the environment is:

We like to think that we change our environment, but the truth is that it changes us.  So we have to be extraordinarily careful to choose the right environment….

 

THE PERILS OF AN ELITE EDUCATION

Spier observes that having an education from a top university often does not prevent one from making foolish and immoral decisions, especially when money or power is involved:

Our top universities mold all these brilliant minds.  But these people – including me – still make foolish and often immoral choices.  This also goes for my countless peers who, despite their elite training, failed to walk away from nefarious situations in other investment banks, brokerages, credit-rating agencies, bond insurance companies, and mortgage lenders.

Having stumbled quite badly, Spier felt sufficiently humbled and humiliated that he was willing to reexamine everything he believed.  Thus, in the wake of the worst set of decisions of his life, Spier learned important lessons about Wall Street and about himself that he never could have learned at Oxford or Harvard.

For one thing, Spier learned that quite a few people are willing to distort the truth in order to further their “own narrow self-interest.”  But having discovered Warren Buffett, who is both highly ethical and arguably the best investor ever, Spier began to see that there is another way to succeed.  “This discovery changed my life.”

 

WHAT WOULD WARREN BUFFETT DO?  WHAT WOULD CHARLIE MUNGER DO?  WHAT WOULD MARCUS AURELIUS DO?

Spier argues that choosing the right heroes to emulate is very powerful:

There is a wisdom here that goes far beyond the narrow world of investing.  What I’m about to tell you may be the single most important secret I’ve discovered in all my decades of studying and stumbling.  If you truly apply this lesson, I’m certain that you will have a much better life, even if you ignore everything else I write!

Having found the right heroes, one can become more like them gradually if one not only studies them relentlessly, but also tries to model their behavior.  For example, it is effective to ask oneself:  “What would Warren Buffett do if he were in my shoes right now?  What would Charlie Munger do?  What would Marcus Aurelius do?”

This is a surprisingly powerful principle: modeling the right heroes.  It can work just as well with eminent dead people, as Munger has pointed out.  One can relentlessly study and then model Socrates or Jesus, Epictetus or Seneca, Washington or Lincoln.  With enough studying and enough effort to copy / model, one’s behavior will gradually improve to be more like that of one’s chosen heroes.

 

ENVIRONMENT TRUMPS INTELLECT

Our minds are not strong enough on their own to overcome the environment:

…I felt that my mind was in Omaha, and I believed that I could use the force of my intellect to rise above my environment.  But I was wrong: as I gradually discovered, our environment is much stronger than our intellect.  Remarkably few investors – either amateur or professional – truly understand this critical point.  Great investors like Warren Buffett (who left New York and returned to Omaha) and Sir John Templeton (who settled in the Bahamas) clearly grasped this idea, which took me much longer to learn.

For long-term value investors, the farther away from Wall Street one is, the easier it is to master the skills of patience, rationality, and independent thinking.

 

CAUSES OF MISJUDGMENT

Charlie Munger gave a talk in 1995 at Harvard on 24 causes of misjudgment.  At the time, as Spier writes, this worldly wisdom – combining powerful psychology with economics and business – was not available anywhere else.  Munger’s talk provides deep insight into human behavior.  Link to speech: http://www.rbcpa.com/mungerspeech_june_95.pdf

Decades of experiments by Daniel Kahneman, Amos Tversky, and others have shown that humans have two mental systems: an intuitive system that operates automatically (and subconsciously) and a reasoning system that requires conscious effort.  Through years of focused training involving timely feedback, some people can train themselves to regularly overcome their subconscious and automatic biases through the correct use of logic, math, or statistics.

But the biases never disappear.  Even Kahneman admits that, despite his deep knowledge of biases, he is still automatically “wildly overconfident” unless he makes the conscious effort to slow down and to use his reasoning system.

 

LUNCH WITH WARREN

Guy Spier and Mohnish Pabrai had the winning bid for lunch with Warren Buffett – the proceeds go to GLIDE, a charity.

One thing Spier learned – directly and indirectly – from lunch with Warren is that the more one genuinely tries to help others, the happier life becomes.  Writes Spier:

As I hope you can see from my experience, when your consciousness or mental attitude shifts, remarkable things begin to happen.  That shift is the ultimate business tool and life tool.

At the lunch, Warren repeated a crucial lesson:

It’s very important always to live your life by an inner scorecard, not an outer scorecard.

In other words, it is essential to live in accord with what one knows at one’s core to be right, and never be swayed by external forces such as peer pressure.  Buffett pointed out that too often people justify misguided or wrong actions by reassuring themselves that ‘everyone else is doing it.’

Moreover, Buffett said:

People will always stop you from doing the right thing if it’s unconventional.

Spier asked Buffett if it gets easier to do the right thing.  After pausing for a moment, Buffett said: ‘A little.’

Buffett also stressed the virtue of patience when it comes to investing:

If you’re even a slightly above average investor who spends less than you earn, over a lifetime you cannot help but get very wealthy – if you’re patient.

Spier realized that he could learn to copy many of the successful behaviors of Warren Buffett, but that he could never be Warren Buffett.  Spier observes that what he learned from Warren was to become the best and most authentic version of Guy Spier.

 

HANDLING ADVERSITY

One effective way Spier learned to deal with adversity was by:

…studying heroes of mine who had successfully handled adversity, then imagining that they were by my side so that I could model their attitudes and behavior.  One historical figure I used in this way was the Roman emperor and Stoic philosopher Marcus Aurelius.  At night, I read excerpts from his Meditations.  He wrote of the need to welcome adversity with gratitude as an opportunity to prove one’s courage, fortitude, and resilience.  I found this particularly helpful at a time when I couldn’t allow myself to become fearful.

Moreover, Spier writes about heroes who have overcome serious mistakes:

I also tried to imagine how Sir Ernest Shackleton would have felt in my shoes.  He had made grievous mistakes on his great expedition to Antarctica – for example, failing to land his ship, Endurance, when he could and then abandoning his first camp too soon.  Yet he succeeded in putting these errors behind him, and he ultimately saved the lives of everyone on his team.  This helped me to realize that my own mistakes were an acceptable part of the process.  Indeed, how could I possibly pilot the wealth of my friends and family without making mistakes or encountering the occasional storm?  Like Shackleton, I needed to see that all was not lost and to retain my belief that I would make it through to the other side.

 

CREATING THE IDEAL ENVIRONMENT

Overcoming our cognitive biases and irrational tendencies is not a matter of simply deciding to use one’s rational system.  Rather, it requires many years of training along with specific tools or procedures that help reduce the number of mistakes:

Through painful experience… I discovered that it’s critical to banish the false assumption that I am truly capable of rational thought.  Instead, I’ve found that one of my only advantages as an investor is the humble realization of just how flawed my brain really is.  Once I accepted this, I could design an array of practical work-arounds based on my awareness of the minefield within my mind. 

No human being is perfectly rational.  Every human being has at one time or another made an irrational decision.  We all have mental shortcomings:

…The truth is, all of us have mental shortcomings, though yours may be dramatically different from mine.  With this in mind, I began to realize just how critical it is for investors to structure their environment to counter their mental weaknesses, idiosyncrasies, and irrational tendencies.

Spier describes how hard he worked to create an ideal environment with the absolute minimum of factors that could negatively impact his ability to think rationally:

Following my move to Zurich, I focused tremendous energy on this task of creating the ideal environment in which to invest – one in which I’d be able to act slightly more rationally.  The goal isn’t to be smarter.  It’s to construct an environment in which my brain isn’t subjected to quite such an extreme barrage of distractions and disturbing forces that can exacerbate my irrationality.  For me, this has been a life-changing idea.  I hope that I can do it justice here because it’s radically improved my approach to investing, while also bringing me a happier and calmer life.

As we shall see in a later chapter, I would also overhaul my basic habits and investment procedures to work around my irrationality.  My brain would still be hopelessly imperfect. But these changes would subtly tilt the playing field to my advantage.  To my mind, this is infinitely more helpful than focusing on things like analysts’ quarterly earnings reports, Tobin’s Q ratio, or pundits’ useless market predictions – the sort of noise that preoccupies most investors.

 

LEARNING TO TAP DANCE

Spier, like Pabrai, believes that mastering the game of bridge improves one’s ability to think probabilistically:

Indeed, as a preparation for investing, bridge is truly the ultimate game.  If I were putting together a curriculum on value investing, bridge would undoubtedly be a part of it!

For investors, the beauty of bridge lies in the fact that it involves elements of chance, probabilistic thinking, and asymmetric information.  When the cards are dealt, the only ones you can look at are your own.  But as the cards are played, the probabilistic and asymmetric nature of the game becomes exquisite!

With my bridge hat on, I’m always searching for the underlying truth, based on insufficient information.  The game has helped me to recognize that it’s simply not possible to have a complete understanding of anything.  We’re never truly going to get to the bottom of what’s going on inside a company, so we have to make probabilistic inferences.

Chess is another game that can improve one’s cognition in other areas.  Spier cites the lesson given by chess champion Edward Lasker:

When you see a good move, look for a better one.  

The lesson for investing:

When you see a good investment, look for a better investment.

Spier also learned, both from having fun at games such as bridge and chess, and from watching business people including Steve Jobs and Warren Buffett, that having a more playful attitude might help.  More importantly, whether via meditation or via other hobbies, if one could cultivate inner peace, that could make one a better investor.

The great investor Ray Dalio has often mentioned transcendental meditation as leading to a peaceful state of mind where rationality can be maximized and emotions minimized.  See: https://www.youtube.com/watch?v=zM-2hGA-k5E

Spier explains:

To give you an analogy, when you drop a stone in a calm pond, you see the ripples.  Likewise, in investing, if I want to see the big ideas, I need a peaceful and contented mind.

 

INVESTING TOOLS

Having written about various ways that he has made his environment as peaceful as possible – he also has a library full of great books (1/3 of which are unread), with no internet or phone – Spier next turns to ‘rules and routines that we can apply consistently.’

In the aftermath of the financial crisis, I worked hard to establish for myself this more structured approach to investing, thereby bringing more order and predictability to my behavior while also reducing the complexity of my decision-making process.  Simplifying everything makes sense, given the brain’s limited processing power”!

Some of these rules are broadly applicable; others are more idiosyncratic and may work better for me than for you.  What’s more, this remains a work in progress – a game plan that I keep revising as I learn from experience what works best.  Still, I’m convinced that it will help you enormously if you start thinking about your own investment processes in this structured, systematic way.  Pilots internalize an explicit set of rules and procedures that guide their every action and ensure the safety of themselves and their passengers.  Investors who are serious about achieving good returns without undue risk should follow their example.

Here are Spier’s rules:

Rule #1 – Stop Checking the Stock Price

A constantly moving stock price influences the brain – largely on a subconscious level – to want to take action.  But for the long-term value investor, the best thing is almost always to do nothing at all.  Thus, it is better only to check prices once per week, or even once per quarter or once per year:

Checking the stock price too frequently uses up my limited willpower since it requires me to expend unnecessary mental energy simply resisting these calls to action.  Given that my mental energy is a scarce resource, I want to direct it in more constructive ways.

We also know from behavioral finance research by Daniel Kahneman and Amos Tversky that investors feel the pain of loss twice as acutely as the pleasure from gain.  So I need to protect my brain from the emotional storm that occurs when I see that my stocks – or the market – are down.  If there’s average volatility, the market is typically up in most years over a 20-year period.  But if I check it frequently, there’s a much higher probability that it will be down at that particular moment… Why, then, put myself in a position where I may have a negative emotional reaction to this short-term drop, which sends all the wrong signals to my brain?

…After all, Buffett didn’t make billions off companies like American Express and Coca-Cola by focusing on the meaningless movements of the stock ticker.

 

Rule #2 – If Someone Tries to Sell You Something, Don’t Buy It

The brain will often make terrible decisions in response to detailed pitches from gifted salespeople.

Rule #3 – Don’t Talk to Management

Beware of CEO’s and other top management, no matter how charismatic, persuasive, and amiable they seem.  Most managers have natural biases towards their own companies.

Rule #4 – Gather Investment Research in the Right Order

We know from Munger’s speech on the causes of human misjudgment that the first idea to enter the brain tends to be the one that sticks.

Spier starts with corporate filings – ‘meat and vegetables’ – before consuming news and other types of information.

Rule #5 – Discuss Your Investment Ideas Only with People Who Have No Axe to Grind

The idea is to try to find knowledgeable people who can communicate in an objective and logical way, minimizing the influence of various biases.

Rule #6 – Never Buy or Sell Stocks When the Market is Open

This again relates to the fact that flashing stock prices push the brain subconsciously towards action:

When it comes to buying and selling stocks, I need to detach myself from the price action of the market, which can stir up my emotions, stimulate my desire to act, and cloud my judgment.  So I have a rule, inspired by Mohnish, that I don’t trade stocks while the market is open.  Instead, I prefer to wait until trading hours have ended.

Rule #7 – If a Stock Tumbles after You Buy It, Don’t Sell It for Two Years

When you’ve lost a lot of money, many negative emotions occur.

Mohnish developed a rule to deal with the psychological forces aroused in these situations: if he buys a stock and it goes down, he won’t allow himself to sell it for two years.

…Once again, it acts as a circuit breaker, a way to slow me down and improve my odds of making rational decisions.  Even more important, it forces me to be more careful before buying a stock since I know that I’ll have to live with my mistake for at least two years.  That knowledge helps me to avoid a lot of bad investments.  In fact, before buying a stock, I consciously assume that the price will immediately fall by 50 percent, and I ask myself if I’ll be able to live through it.  I then buy only the amount that I could handle emotionally if this were to happen.

Mohnish’s rule is a variation on an important idea that Buffett has often shared with students:

I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it, so that you had 20 punches – representing investments that you got to make in a lifetime.  And once you’d punched through the card, you couldn’t make any more investments at all.  Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about.  So you’d do much better.

Rule #8 – Don’t Talk about Your Current Investments

Once we’ve made a public statement, it’s psychologically difficult to back away from what we’ve said.  The automatic intuitive system in our brains tries to quickly remove doubt by jumping to conclusions.  This system also tries to eliminate any apparent inconsistencies in order to maintain a coherent – albeit highly simplified – story about the world.

But it’s not just our intuitive system that focuses on confirming evidence.  Even our logical system – the system that can do math and statistics – uses a positive test strategy:  When testing a given hypothesis, our logical system looks for confirming evidence rather than disconfirming evidence.  This is the opposite of what works best in science.

Thus, once we express a view, our brain tends to see all the reasons why the view must be correct and our brain tends to be blind to reasons why the view might be wrong.

 

AN INVESTOR’S CHECKLIST

Atul Gawande, a former Rhodes scholar, is a surgeon at Brigham and Women’s Hospital in Boston, a professor of surgery at Harvard Medical School, and a renowned author.  He’s ‘a remarkable blend of practitioner and thinker, and also an exceptionally nice guy.’  In December 2007, Gawande published a story in The New Yorker entitled “The Checklist”:  http://www.newyorker.com/magazine/2007/12/10/the-checklist

One of Gawande’s main points is that ‘intensive-care medicine has grown so far beyond ordinary complexity that avoiding daily mistakes is proving impossible even for our super-specialists.’

Gawande then described the work of Peter Pronovost, a critical-care specialist at Johns Hopkins Hospital.  Pronovost designed a checklist after a particular patient nearly died:

Pronovost took a single sheet of paper and listed all of the steps required to avoid the infection that had almost killed the man.  These steps were all ‘no-brainers,’ yet it turned out that doctors skipped at least one step with over a third of their patients.  When the hospital began to use checklists, numerous deaths were prevented.  This was partly because checklists helped with memory recall, ‘especially with mundane matters that are easily overlooked,’ and partly because they made explicit the importance of certain precautions.  Other hospitals followed suit, adopting checklists as a pragmatic way of coping with complexity.

Mohnish Pabrai and Guy Spier, following Charlie Munger, realized that they could develop a useful checklist for value investing.  The checklist makes sense as a way to overcome the subconscious biases of the human intuitive system.  Moreover, humans have what Spier calls “cocaine brain”:

the intoxicating prospect of making money can arouse the same reward circuits in the brain that are stimulated by drugs, making the rational mind ignore supposedly extraneous details that are actually very relevant.  Needless to say, this mental state is not the best condition in which to conduct a cool and dispassionate analysis of investment risk.

An effective investor’s checklist is based on a careful analysis of past mistakes, both by oneself and by others.

My own checklist, which borrows shamelessly from [Mohnish Pabrai’s], includes about 70 items, but it continues to evolve.  Before pulling the trigger on any investment, I pull out the checklist from my computer or the filing cabinet near my desk to see what I might be missing.  Sometimes, this takes me as little as 15 minutes, but it’s led me to abandon literally dozens of investments that I might otherwise have made…

As I’ve discovered from having ADD, the mind has a way of skipping over certain pieces of information – including rudimentary stuff like where I’ve left my keys.  This also happens during the investment process.  The checklist is invaluable because it redirects and challenges the investor’s wandering attention in a systematic manner…

That said, it’s important to recognize that my checklist should not be your checklist.  This isn’t something you can outsource since your checklist has to reflect your own unique experience, knowledge, and previous mistakes.  It’s critical to go through the arduous process of analyzing where things have gone wrong for you in the past so you can see if there are any recurring patterns or particular areas of vulnerability.

It is very important to note that there are at least four categories of investment mistakes, all of which must be identified, studied, and learned from:

• • A mistake where the investment does poorly because the intrinsic value of the business in question turns out to be lower than one thought;
  • A mistake of omission, where one fails to invest in a stock that one knows is cheap;
  • A mistake of selling the stock too soon.  Often a value investment will fail to move for years.  When it finally does move, many value investors will sell far too soon, sometimes missing out on an additional 300-500% return (or even more).  Value investors Peter Cundill and Robert Robotti have discussed this mistake.
  • A mistake where the investment does well, but one realizes that the good outcome was due to luck and that one’s analysis was incorrect.  It is often difficult to identify this type of mistake because the outcome of the investment is good, but it’s crucial to do so, otherwise one’s future results will be penalized.

Here is the value investor Chris Davis talking about how he and his colleagues frame their mistakes on the wall in order never to forget the lessons:  http://davisfunds.com/document/video/mistake_wall

Davis points out that, as an investor, one should always be improving with age.  As Buffett and Munger say, lifelong learning is a key to success, especially in investing, where all knowledge is cumulative.   Frequently one’s current decisions are better and more profitable as a result of having learned the right lessons from past mistakes.

 

DOING BUSINESS THE BUFFETT-PABRAI WAY

Buffett:

Hang out with people better than you, and you cannot help but improve.

Pabrai likes to quote Ronald Reagan:

There’s no limit to what you can do if you don’t mind who gets the credit.

Buffett also talks about the central importance of treating others as one wishes to be treated:

The more love you give, the more love you get.

Spier says that this may be the most important lesson of all.  The key is to value each person as an end rather than a means.  It helps to remember that one is a work in progress and also that one is mortal.  Pabrai:

I am but ashes and dust.

Spier explains that he tries to do things for people he meets.  Over time, he has learned to distinguish givers from takers.

The crazy thing is that, when you start to live this way, everything becomes so much more joyful.  There is a sense of flow and alignment with the universe that I never felt when everything was about what I could take for myself…

I’m not telling you this to be self-congratulatory as there are countless people who do so much more good than I do.  The point is simply that life has improved immeasurably since I began to live this way.  In truth, I’ve become increasingly addicted to the positive emotions awakened in me by these activities… One thing is for sure: I receive way more by giving than I ever did by taking.  So, paradoxically, my attempts at selflessness may actually be pretty selfish.

 

THE QUEST FOR TRUE VALUE

Buffett calls it the inner scorecard and Spier calls it the inner journey:

The inner journey is that path to becoming the best version of ourselves that we can be, and this strikes me as the only true path in life.  It involves asking questions such as:  What is my wealth for?  What give my life meaning?  And how can I use my gifts to help others?

Templeton also devoted much of his life to the inner journey.  Indeed, his greatest legacy is his charitable foundation, which explores ‘the Big Questions of human purpose and ultimate reality,’ including complexity, evolution, infinity, creativity, forgiveness, love, gratitude, and free will.  The foundation’s motto is ‘How little we know, how eager to learn.’

In my experience, the inner journey is not only more fulfilling but is also a key to becoming a better investor.  If I don’t understand my inner landscape – including my fears, insecurities, desires, biases, and attitude to money – I’m likely to be mugged by reality.  This happened early in my career, when my greed and arrogance led me to D. H. Blair… [also later in New York with envy]

By embarking on the inner journey, I became more self-aware and began to see these flaws more clearly.  I could work to overcome them only once I acknowledged them.  But these traits were so deepseated that I also had to find practical ways to navigate around them.

The important thing is to understand not only human biases in general, but also one’s own unique brain.  Also, some lessons can only be learned through difficult experiences – including mistakes:

Adversity may, in fact, be the best teacher of all.  The only trouble is that it takes a long time to live through our mistakes and then learn from them, and it’s a painful process.

It doesn’t matter exactly how you do the inner journey, just that you do it.

[The] real reward of this inner transformation is not just enduring investment success.  It’s the gift of becoming the best person we can be.  That, surely, is the ultimate prize. 

 

BOOLE MICROCAP FUND

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:  https://boolefund.com/best-performers-microcap-stocks/

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: jb@boolefund.com

 

 

 

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.

5/11/25

Paul Mueller (MUEL) is a company that manufactures innovative stainless steel processing equipment.

(h/t Maj Soueidan of GeoInvesting)

Here are the industries that MUEL currently serves:

• • Dairy farming
  • Biotechnology
  • Process cooling
  • Food processing
  • Beverage processing
  • Chemical processing
  • Thermal energy storage
  • HVAC and heat recovery
  • Water purification/distillation
  • Pharmaceutical manufacturing
  • Industrial tank and vessel fabrication
  • Specialty transport and logistics (contract carriage)

The company has had a high cash balance and virtually no debt for years.  MUEL recently started buying back stock at a P/E of 8 or lower.  Its first buyback was completed in April 2024 at $80 for $15 million.  The buyback recently announced is for $15 million at $250.

But the company still has $55.3 million in cash and only $6.9 million in debt.

The company has little exposure to tariffs, as most of its activities are based in the United States, including recent facility expansions. (But they do have a manufacturing facility in Vietnam.)

MUEL just reported Q1 2025 EPS of $5.26, up from $4.10 a year ago. Sales climbed to $58.9 million from $50.4 million. Q1 is usually the company’s seasonally weakest quarter.

Q4 2024—reported a couple of weeks ago—showed EPS of $11.89 vs. $4.32 in Q4 2023.  Q4 2024 revenue was $70.4 million vs. $55.7 million in Q4 2023.

More importantly, according to the Q1 2025 report, MUEL’s backlog jumped to $254.5 million, nearly tripling from $95.2 million one year earlier. This is MUEL’s highest backlog in years.

If we translate the backlog into earnings, we get about $42 in EPS, or a forward P/E of 6.9.

One major component of the backlog is a newly announced $120 million pharmaceutical contract, which will be fulfilled through 2026​.  This is part of the company’s strategy to enter new growth markets.

Furthermore, in addition to the $30 million stock buyback, MUEL has launched three capacity expansions in 18 months, adding 131,000 square feet to its manufacturing operations.  This includes a $17.9 million project in April 2025, part of the company’s goal to modularize production by pre-assembling large units.

According to the company, the modular assemblies shift complex construction from the customer’s site to MUEL’s controlled manufacturing environment and result in:

• • Reduced risk: Building and testing large equipment modules in-house minimizes surprises. On-site construction in industries like pharma often involves tight space, regulatory scrutiny, and coordination with ongoing operations. By delivering fully assembled, tested units, MUEL lowers the chance of installation delays, compliance issues, or costly errors.
  • Faster implementation: Modular systems arrive ready to go. Instead of weeks or months of assembly at the customer’s location, installation becomes more like plug-and-play. That translates to shorter project timelines, quicker regulatory signoff, and faster time-to-value for the client.

In the 2024 shareholder letter, CEO David Moore explained the advantages of its new modular assembly capabilities:

The modular assembly of processing equipment allows us to set the vessels, heat exchangers, piping, and controls into structural frames shipped to the customer and installed as one module, reducing the time and risk required to assemble this equipment at the customer’s site. This method is popular in the pharmaceutical industry, where the largest modules are known as superskids, but this practice has applications in other industries we serve.

Moore adds:

The current backlog, combined with investments in equipment and talent, puts the Company in a strong operational and financial position.

Moore concludes:

By producing components like tank heads, manways, heat exchangers, and machined parts in-house, fabricating a wide range of vessels, and performing modular construction in our factory, we significantly reduce the number of vendors, risks, and costs for our customers.

The market cap is $269.8 million while enterprise value is $221.4 million.

Here are the metrics of cheapness:

• • EV/EBITDA = 5.05
  • P/E = 8.95
  • P/B = 3.19
  • P/CF = 4.92
  • P/S = 1.05

For a company with MUEL’s growth prospects—based on its capacity expansions and its backlog—these metrics are quite low.

Insider ownership is 7.7%, which is decent (worth over $20 million).  ROE (return on equity) is 39.7%, which is excellent.  The Piotroski F_Score is outstanding at 8.

As noted, the company has $55.3 million in cash and only $6.9 million in debt.  And TL/TA (total liabilities to total assets) is 50%, which is pretty good.

Intrinsic value scenarios:

• • Low case: If there’s a bear market or a recession, the stock could decline temporarily. That would be a buying opportunity.
  • Mid case: The forward P/E is 6.9 but should be at least 16. This translates into a share price of $667.83, which is over 130% higher than today’s stock price of $288.
  • High case: Arguably, the forward P/E should be 20.  This translates into a share price of $834.78, which is 190% higher than today’s stock price of $288.

 

RISKS

• • As noted, there could be a bear market or a recession that would likely drive down the stock price temporarily.

 

BOOLE MICROCAP FUND

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: https://boolefund.com/best-performers-microcap-stocks/

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 approachesintrinsic 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: jb@boolefund.com

 

 

 

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.

April 27, 2025

ADF Group (DRX.TO / ADFJF) is a North American steel fabrication company that designs, engineers, and produces complex steel structures. They specialize in connection design, industrial coating, and installation, using advanced automation and robotics to complete high-quality projects quickly.

ADF runs two fabrication plants—in Terrebonne, Quebec, and Great Falls, Montana—plus two paint shops and a U.S. construction division focused on steel erection.

(h/t Jumpman23 on Value Investors Club.  See here: https://valueinvestorsclub.com/idea/ADF_GROUP_INC/0351385969)

The company operates mainly in Canada and the United States, with strong coverage in the U.S. Midwest, Southeast, and West, and Eastern Canada. It serves the non-residential construction market, including commercial buildings (like office towers and recreational centers), industrial facilities (such as pharmaceutical and automotive plants), transportation infrastructure, and public projects like airports.

The company recently completed an investment in robotics and automation at its Terrebonne plant that significantly improved ADF’s addressable revenue opportunity and ability to permanently fabricate higher volumes at a more profitable margin.

ADF Group may make a similar investment in its Great Falls, Montana plant, which would take roughly one year to complete.

Furthermore, the Infrastructure Investment and Jobs Act (IIJA) still has $300 billion to award through 2026.  Management continues to emphasize a strong growth cycle expected over the next three to five years.

Also, the long-term demand for infrastructure investment will continue well beyond the expiration of the IIJA bill.  Moreover, many companies are planning to invest in manufacturing facilities in the United States.  This includes TSMC’s $100 billion initiative to build five new factories in the U.S., Eli Lilly’s $27 billion investment in four new production facilities, and Apple’s plan to open a 250,000-square-foot server manufacturing plant in Houston.

Regarding tariffs, there could end up being exemptions on steel fabrication, given the impact on U.S. infrastructure projects. Even in a worst-case scenario, tariffs would only affect steel fabrication exports from the Terrebonne facility to the United States, which account for 40–50% of total revenues. Other revenue streams—such as design, construction, and installation—would remain unaffected.

Management has indicated that there is flexibility to shift some fabrication work from the Terrebonne plant in Quebec to the Great Falls facility in Montana, providing a way to avoid tariff impacts.

As for guidance, management continues to guide for higher revenues, which appears to be at odds for what the market is expecting. The pro-forma backlog now stands at ~$450 million, greater than where it was prior to the recent sell-off in the stock. More importantly, this reinforces management’s credibility around guidance.

The market cap is $135.63 million while enterprise value is $125.29 million.

Here are the metrics of cheapness:

• • EV/EBITDA = 2.03
  • P/E = 3.42
  • P/B = 1.11
  • P/CF = 3.42
  • P/S = 0.57

These are exceptionally low metrics of cheapness.

Insider ownership is 13.2%, which is good.  ROE (return on equity) is 34.3%, which is excellent.  The Piotroski F_Score is terrific at 8.

Cash is $59.98 million while debt is $45.63 million.  And TL/TA is low at 45%.

Intrinsic value scenarios:

• • Low case: If there’s a bear market or a recession, the stock could decline temporarily. That would be a buying opportunity.
  • Mid case: The current EV/EBITDA is 2.03, but should be at least 7. That would mean a fair value of $14.84 a share, which is 225% higher than today’s stock price of $4.55 a share.
  • High case: The P/E should be 15.  This translates into a share price of $19.96, which is over 335% higher than today’s stock price of $4.55 a share.

 

RISKS

• • There could be a bear market or a recession, although infrastructure spending looks solid over the next three to five years.
  • General tariffs by the U.S. against Canada, and specific tariffs by the U.S. against steel, may stay in place for some time. But tariffs would only affect steel fabrication exports from the Terrebonne facility to the United States, which account for 40–50% of total revenues. Other revenue streams—such as design, construction, and installation—would remain unaffected. Also, as noted, the company could shift some steel fabrication to its Great Falls, Montana, facility.

 

BOOLE MICROCAP FUND

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: https://boolefund.com/best-performers-microcap-stocks/

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 approachesintrinsic 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: jb@boolefund.com

 

 

 

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.

April 20, 2025

I profiled Zoomd before, but the stock is significantly more undervalued today, so I decided to do this case study update.

Zoomd Technologies (ZOMD.V / ZMDTF) is an Israel-based digital advertising and monetization company that offers a mobile-first user acquisition platform powered by proprietary, patented technology. It provides advertisers with a unified dashboard connected to over 600 media sources and serves publishers as an onsite search engine. This unique position allows Zoomd to act as a one-stop shop for digital campaigns, helping advertisers target high-value users efficiently.

Zoomd’s platform sits atop the digital media ecosystem—integrated with social networks, device manufacturers, ad networks, and publishers—thus minimizing dependence on any single platform like Google or Facebook. With a strategic focus on high-growth sectors such as fintech, gaming, and e-commerce, Zoomd serves prominent clients like Sony Pictures, Crypto.com, and SHEIN, positioning itself as a scalable, privacy-proof solution in the evolving adtech landscape.

The market cap is $34.34 million while enterprise value is $28.67 million.

Here are the metrics of cheapness:

• • EV/EBITDA = 2.48
  • P/E = 4.39
  • P/B = 1.97
  • P/CF = 4.47
  • P/S = 0.68

There are very low metrics of cheapness.

Insider ownership is 29.2%, which is very good.  ROE (return on equity) is 67.5%, which is excellent.  The Piotroski F_Score is good at 7.

Cash is $9.28 million while debt is $3.56 million.  And TL/TA is 38%, quite low.

Intrinsic value scenarios:

• • Low case: If there’s a bear market or a recession, the stock could decline temporarily. That would be a buying opportunity.
  • Mid case: The current P/E is 4.39 but should be at least 10. This translates into a share price of $0.80, which is over 125% higher than today’s stock price of $0.351.
  • High case: Arguably, the P/E should be 15.  This translates into a share price of $1.20, which is over 240% higher than today’s stock price of $0.351.

 

RISKS

• • Tariffs are weighing on the stock in the near term. But it’s likely that the U.S. and China will work out some sort of deal, at least in the medium term, which would lower tariffs significantly.

 

BOOLE MICROCAP FUND

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: https://boolefund.com/best-performers-microcap-stocks/

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 approachesintrinsic 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: jb@boolefund.com

 

 

 

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.

April 13, 2025

Total Telcom Inc. (TTZ.V / TTLTF) is a Canadian microcap company providing remote asset management solutions through wireless technologies. With nearly 55% of its $3.37 million market cap in cash, no debt and solid profitability, the downside is limited. It has three main revenue streams—hardware sales, recurring communication services, and race-day equipment rentals—with total gross margins exceeding 60%. The recurring revenue business has reached break-even, and management expects further growth as new products are commercialized. The company’s real advantage lies in cost-effective, user-friendly integration of its technology, helping clients reduce manual labor, optimize operations, and manage assets remotely with low data usage and high reliability.

The business is capitalizing on emerging trends in satellite communications, environmental monitoring, and white-label partnerships. Management owns over 28% of the company and is aligned with shareholder interests through modest compensation and significant equity stakes. The company’s clean balance sheet and scalable business model position it well for future growth. With market demand rising for remote data solutions due to climate and infrastructure needs, and with satellite communication markets projected to quadruple by 2028, Total Telcom appears conservatively valued with limited downside and strong upside potential if growth accelerates through marketing and strategic partnerships.

The market cap is $3.37 million while enterprise value is $1.49 million.

Here are the metrics of cheapness:

• • EV/EBITDA = 2.82
  • P/E = 15.58
  • P/B = 0.90
  • P/CF = 4.13
  • P/S = 2.35

Insider ownership is 28.8%, which is good.  ROE (return on equity) is 6.3%, which is low but should improve as the company’s earnings improve.  The Piotroski F_Score is decent at 6.

Cash is $3 million while debt is zero.  And TL/TA is 10.9%, exceptionally low.

Intrinsic value scenarios:

• • Low case: If there’s a bear market or a recession, the stock could decline temporarily. With 55% of the market cap in cash, no debt and solid profitability, the downside is limited.
  • Mid case: Net income could reach $500,000 in 2026 assuming $2.5 million in sales and a 20% net income margin. With a P/E of 15, the market cap would be $7.5 million.  This translates into a share price of $0.27, which is over 120% higher than today’s $0.12.
  • High case: With a P/E of 20, the market cap would be $10 million.  This translates into a share price of $0.36, which is almost 200% higher than today’s $0.12.

 

RISKS

• • Tariffs are weighing on the stock in the near term, but the company is looking to expand in places such as Canada, South America, Europe, and Australia. And as noted, with 55% of the market cap in cash, no debt and solid profitability, the downside is limited.

 

BOOLE MICROCAP FUND

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: https://boolefund.com/best-performers-microcap-stocks/

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 approachesintrinsic 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: jb@boolefund.com

 

 

 

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.

April 6, 2025

Canaf Investments is a South African focused public company with four divisions:

Southern Coal – South Africa Southern Coal produces calcined anthracite, which is primarily sold as a substitute to coke in sintering processes.  Southern Coal supplies world leading steel and ferromanganese producers in South Africa.

Canaf Estate Holdings – South Africa Canaf Estate Holdings is a property investment company focused on acquiring, redeveloping and renting properties primarily within the suburbs of the old Johannesburg.

Canaf Agri – South Africa Canaf Agri is exploring investment opportunities in the agriculture sector in South Africa.

Canaf Capital – South Africa Canaf Capital is an investment company focused on providing capital for short-term financing to businesses and entrepreneurs in South Africa.

Of these four divisions, Sout Africa Southern Coal is by far the largest.

Canaf Investments is a tiny company engaged in boring businesses, thus the stock is completely overlooked by most investors.  But the stock is super cheap.

The market cap is $10.01 million while enterprise value is $3.16 million.

Here are the metrics of cheapness:

• • EV/EBITDA = 1.11
  • P/E = 6.26
  • P/B = 1.52
  • P/CF = 2.37
  • P/S = 0.47

Canaf’s metrics of cheapness are exceptionally low.

Insider ownership is 17.6%, which is good.  ROE (return on equity) is 23.3%, which is excellent.

Cash is $8.5 million while debt is zero.  And TL/TA is 20.3%, low indeed.

Intrinsic value scenarios:

• • Low case: If there’s a bear market or a recession, the stock could decline temporarily. This would be a major buying opportunity.
  • Mid case: The current P/E is 6.26 but should be at least 12. That would mean the stock is worth $0.42, which is over 90% higher than today’s $0.22.
  • High case: Current EV/EBITDA is 1.11 but should be at least 7.  That would mean the stock is worth $0.59, which is 168% higher than today’s $0.22.

 

RISKS

• • As noted, if there’s a bear market or a recession, the stock could decline temporarily. This would be a major buying opportunity.

 

BOOLE MICROCAP FUND

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: https://boolefund.com/best-performers-microcap-stocks/

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 approachesintrinsic 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: jb@boolefund.com

 

 

 

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.

March 23, 2025

In July 2024, I talked about Geodrill (GEO.TO / GEODF).  But Geodrill’s situation has significantly improved since then, so I am going to update the investment thesis.

Geodrill is a leading drilling services provider focused on gold (90%+ of revenue) and other mineral exploration for major, intermediate, and junior mining companies across Africa and South America. Founded in 1998 by CEO Dave Harper—who still owns over 40% of the company—Geodrill has grown organically from one rig in 1998 to 102 rigs today, with operations in six countries—Cote d’Ivoire, Senegal, and Mali in West Africa; Egypt in North Africa; and Peru and Chile in South America.

The company is known for its quality and long-standing relationships with top-tier clients like Barrick, Newmont, and Kinross. It has successfully shifted its customer base toward senior miners (now ~90% vs. 70% previously) and more stable jurisdictions, securing multi-year contracts worth ~$200 million, providing visibility through 2027.

With gold prices now exceeding $3,000/oz, miners are reinvesting heavily, benefiting Geodrill’s growth prospects. Harper is seeking a sale at 5x EV/EBITDA, valuing the stock at $4.13—more than double its current price of $2.02.

Geodrill reinvested every penny of operating cash flow into expanding their fleet in the most recent year.

On the most recent earnings call, CEO Dave Harper pointed out that the company has been growing on average about 10% a year over the last 8 years.  Harper said of course the company would encounter challenges—there are always challenges—but that growth should be at least 10% a year going forward (if not more, given gold prices over $3,000 an ounce).

Harper said, “We’ve never been more bullish, never been more bullish, never been more bullish.”

Harper notes that the company drills in locations where gold is heavily mined, where it’s relatively easy to mine, but where other people don’t want to mine.

Harper pointed out the company is “really going to shine over the next four years. This will become a cash cow, mark my words.”

The market cap is $94.8 million while enterprise value is $86.7 million.

Here are the metrics of cheapness:

• • EV/EBITDA = 2.69
  • P/E = 8.03
  • P/B = 0.79
  • P/CF = 4.52
  • P/S = 0.67

Geodrill’s metrics of cheapness are exceptionally low.

The company is planning to pay a dividend again—likely $0.01 per quarter this year and a larger dividend in 2026.

As noted, CEO and founder Dave Harper owns 40%+ of the shares.  ROE (return on equity) is 7.9%.  This is a bit low but will move higher because margins should continue to improve, given high gold prices.

Cash is $19.5 million while debt is $11.4 million.  TL/TA is 26%, which is excellent.

Intrinsic value scenarios:

• • Low case: If there’s a bear market or a recession, the stock could decline temporarily. This would be a major buying opportunity.
  • Mid case: As noted, Dave Harper owns 40%+ of the shares and is looking to sell at 5x EV/EBITDA. This would mean a stock price of $4.13 per share, which is over 100% higher than today’s $2.02.
  • High case: EBITDA could reach $50 million by 2027.  At an EV/EBITDA of 6x, the stock would have an intrinsic value of $6.04, about 200% higher than today’s $2.02.

 

RISKS

• • As noted, if there’s a bear market or a recession, the stock could decline temporarily. This would be a major buying opportunity.
  • Gold prices may fall.
  • There could be political instability in Africa or in Peru/Chile. This has rarely been an issue for the company in the past.

 

BOOLE MICROCAP FUND

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: https://boolefund.com/best-performers-microcap-stocks/

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 approachesintrinsic 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: jb@boolefund.com

 

 

 

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.

March 2, 2025

Pyxis Tankers (PXS) is a disciplined, growth-oriented shipping company with a modern eco-fleet that positions it for long-term success. With a focus on mid-sized, eco-efficient vessels, strategic chartering, and a strong financial foundation, the company is well-positioned to capitalize on opportunities in the shipping industry.

(1) Pyxis Tankers operates a fleet designed for versatility, low operating costs, and fuel efficiency. The company currently owns:

• • Three medium-range (MR) product tankers
  • 2.2 dry bulk carriers

This modern, eco-efficient fleet allows Pyxis to remain competitive while ensuring resilience in demand-driven markets. With significant liquidity (“dry powder”) available, the company is actively evaluating the acquisition of up to two additional vessels, further expanding its growth potential.

(2) Pyxis has cultivated long-standing relationships with top-tier global customers, ensuring stability and operational efficiency.

As of January 24th, 2025, the company has secured:

• • 72% of available days for Q1 2025 booked for MR tankers at an average TCE rate of $24,750/day
  • 68% of available days for bulkers booked at an average estimated TCE rate of $15,400/day

With five vessels under short-term time charters and one on a spot voyage, Pyxis Tankers is well-positioned to benefit from rising charter rates, should the market continue to strengthen.

(3) One of Pyxis Tankers’ key advantages is its lean cost structure, which creates operating leverage as charter rates increase. The company maintains:

• • A primarily fixed cost structure, enabling improved earnings potential
  • Highly competitive daily operational costs per vessel, compared to U.S.-listed peers
  • A solid balance sheet with strong liquidity and modest leverage

This disciplined financial management allows Pyxis to remain resilient even in volatile market conditions while continuing to pursue strategic growth opportunities.

(4) The company is led by a highly experienced and incentivized management team, boasting over 100 years of combined expertise in the shipping and capital markets sectors. Key leadership highlights include:

• • Founder & CEO holds ~57% of shares, aligning his interests with shareholders
  • A well-respected Board of Directors, consisting of industry veterans with deep sector knowledge

This level of expertise and leadership stability ensures that Pyxis remains agile, strategic, and disciplined in navigating market cycles.

(5) Despite ongoing market uncertainty, Pyxis Tankers is well-positioned due to constructive demand fundamentals for both the product tanker and dry bulk sectors. Key valuation drivers include:

• • Solid global GDP growth supporting shipping demand
  • Limited vessel supply growth, creating favorable industry dynamics
  • A proven track record of navigating volatile shipping markets

With compelling valuation metrics and a strong financial foundation, Pyxis presents a high-value investment opportunity with significant upside potential.

Pyxis Tankers’ combination of a modern, efficient fleet, strong customer relationships, disciplined financial management, and experienced leadership makes it a standout player in the shipping sector. With continued strategic growth and a focus on operational efficiency, PXS is well-positioned for long-term success in the dynamic global shipping market.

PXS’s market cap is $37.9 million, while its enterprise value is $81.9 million.

Here are the metrics of cheapness:

• • EV/EBITDA = 1.74
  • P/E = 1.27
  • P/B = 0.37
  • P/CF = 2.71
  • P/S = 0.81

ROE (return on equity) is 36.6%, which is excellent.  However, earnings may decline in the short term.

The Piotroski F_Score is 6, which is decent.

Insider ownership is outstanding at 57%.  Cash is $42.4 million while debt is $86.4 million.  TL/TA (total liabilities / total assets) is decent at 44.5%.

Intrinsic value scenarios:

• • Low case: If there’s a bear market and/or a recession, the stock could decline.  Also, the limited fleet size puts the company more at risk for any unforeseen maintenance or damages.
  • Mid case: Pyxis Tankers should have a P/CF of at least 5.  That would put the stock at $6.52, which is 85% higher than today’s $3.53.
  • High case: The company should trade at book value of $9.54.  That is 170% higher than today’s $3.53.

 

RISKS

There could be a bear market and/or a recession, during which shipping rates would likely fall leading to lower earnings and a lower stock price.

Limited fleet size puts the company more at risk for any unforeseen maintenance or damages.

 

BOOLE MICROCAP FUND

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: https://boolefund.com/best-performers-microcap-stocks/

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 approachesintrinsic 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: jb@boolefund.com

 

 

 

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.