Total Telcom (TTZ.V / TTLTF) is a profitable Canadian microcap company, with recurring revenues, no debt, and half of its market cap in cash. Total Telcom offers remote asset management solutions. They specialize in innovative wireless technologies, making it affordable and user-friendly for businesses and consumers to monitor and control their assets remotely.
Their offerings include advanced wireless modems that utilize microcomputers integrated with sensors, GPS engines, WiFi, RFID, and a variety of inputs and outputs. One of their strengths is the user-friendly interface, which requires no special applications or equipment for configuration. Users can easily set up and control these systems through a wireless WiFi connection using any smartphone, tablet, or laptop.
In addition, Total Telcom’s subsidiary, ROM, plays a crucial role as an authorized airtime reseller and hardware developer for satellite, cellular, and wireless IP networks. This integration of technology across various platforms highlights Total Telcom’s position as a key player in the communications industry, keeping the world connected through smarter, more efficient methods.
(h/t Rodrigo Lezama, MicroCapClub.com)
Estimated figures for 2026 in Canadian dollars: Revenue $3.4 million CAD. Net income of $670,000 CAD. EBITDA $804,000 CAD. Cash flow $837,000 CAD. Market cap = $5.81 million CAD. Enterprise value (EV) = $3.39 million CAD.
Metrics of cheapness based on 2026 estimatesa:
EV/EBITDA = 4.22
P/E = 8.67
P/B = 1.17
P/CF = 6.94
P/S = 1.71
ROE = 14.3%, which is OK. The Piotroski F_Score is 7, which is good.
Insider ownership is 30%+, which is excellent. Cash is $2.79 million CAD. Debt = 0. TL/TA (total liabilities to total assets) is 11.5%, which is outstanding.
Intrinsic value scenarios:
Low case: Net income could drop and so could the stock. But book value per share is $0.19 CAD whereas the current stock price is $0.22 CAD. So there is some downside protection from book value.
Mid case: EPS in 2026 should be $0.024 CAD. With a P/E of 16, the stock is worth $0.384 CAD. That is 75% higher than today’s stock price of $0.22 CAD.
High case: EPS in 2026 could reach $0.03 CAD. With a P/E of 20, the stock is worth $0.60 CAD. That is over 170% higher than today’s stock price of $0.22 CAD.
Very high case: The company could grow significantly and the stock could return multiples of the current price.
RISKS
Net income could decline and so could the stock. Or there could be a bear market or recession. In any case, there is some downside protection from book value.
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.
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.
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.
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.
BIOREM (BRM.V / BIRMF) has a mission to engineer, design, manufacture, and distribute the most innovative and effective air emissions abatement technologies in the world.
The company was established in 1990. They are based near Guelph, Ontario (Canada) but they operate in 23 countries around the world. BIOREM has done over 2,000 installations. They have 50+ employees with an average tenure of 10-12 years.
BIOREM offers a full range of engineering and technical solutions. The company is transitioning from being a capital equipment vendor to providing more services, such as upfront engineering, site work, or after sales market.
These are the areas the company works in:
Municipal Wastewater: collection system & headworks; liquid phase treatment; solid treatment.
Solid Waste Management: compost; anaerobic digestion; transfer stations; recycling facilities.
Industrial: pet food; chemical production; petrochemical; food & beverage; agribusiness; semiconductor; surface coatings; wood products.
Here are the results from the third quarter of 2024 in Canadian dollars:
BIOREM reported record quarterly revenues for the third quarter of $14.9 million, an increase of 103% over the previous quarter and 170% higher than the same quarter in 2023. Year to date revenues totalled $28.1 million, a 117% increase over the $13 million reported for the first nine months of 2023. The increase in revenues is largely attributable to the increase in order bookings and continuing delivery of projects from the Company’s large order backlog.
The company commented:
During the quarter the Company booked $6.6 million in new orders resulting in an order backlog of $48.4 million on September 30, 2024. This compares to an order backlog of $57 million on June 30, 2024 and $54.5 million as of September 30, 2023.
The Company expects order bookings to continue to grow and delivery of projects from the order backlog to continue generating strong revenue and earnings growth over the next 12 months.
“In the third quarter, delays related to industry-wide issues with construction projects eased somewhat, allowing BIOREM to catch up on orders in the Company’s backlog,” said Derek S. Webb, President and CEO. “Even as project deliveries accelerated, BIOREM’s sales funnel, outstanding bids, and order backlog remain robust with no signs of softening over the near- to medium-term.”
“Population growth and the need for significant increases in housing construction throughout North America is driving demand for municipal and industrial infrastructure projects that require air emission abatement systems. BIOREM’s experience and performance in delivering both large and small successful air emission abatement projects makes them uniquely positioned to benefit over the long term from this growth cycle.”
Here are figures are in U.S. dollars: BIOREM reported EPS (earnings per share) of $0.12 on a fully diluted basis. EBITDA is $2.18 million. Cash flow is $3.17 million. Revenue is $10.73 million. The market cap is $31.1 million, while enterprise value is $28.5 million.
And here are the metrics of cheapness based on annualizing the most recent quarter:
EV/EBITDA = 3.27
P/E = 4.38
P/B = 4.36
P/CF = 2.45
P/S = 0.72
ROE is 59.7%, which is outstanding.
The Piotroski F_Score is 7, which is quite good.
Insider ownership is 16%, which is good. Cash is $7.3 million while debt is $3.9 million. TL/TA (total liabilities / total assets) is 59.0%, which is OK.
Intrinsic value scenarios:
Low case: If there’s a bear market and/or a recession, the stock could decline. That would be a buying opportunity.
Mid case: BIOREM should have a P/E of at least 10. That would mean the stock is worth $4.80, which is over 125% higher than today’s $2.10.
High case: Arguably, the company should have a P/E of 15. That would mean the stock is worth $7.20, which is over 240% higher than today’s $2.10.
Very high case: If BIOREM can continue to grow its revenues and backlog, while also transitioning towards services instead of just capital equipment, the P/E could reach 20. That would mean the stock is worth $9.60, which is over 355% higher than today’s $2.10.
RISKS
If there’s a bear market or a recession, the stock would probably decline temporarily.
If the company does not continue to win new business, revenue and earnings would decline.
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.
The Shiller P/E—also called the 10-year P/E or the cyclically adjusted P/E (CAPE)—recently exceeded 38. This is in the top 0.5% of history. The CAPE has only been higher one time—December 1999, when it reached 44.
However, according to John Hussman’s most reliable P/E ratio, the S&P 500 index today is at its most overvalued level ever, including December 1999. John Hussman writes:
MarketCap/GVA is the ratio of the market capitalization of nonfinancial companies to gross value-added, including our estimate of foreign revenues, and is our most reliable gauge of market valuation (based on correlation with actual, subsequent 10-12 year S&P 500 total returns in market cycles across history). The current level of 3.3 is the highest extreme in history, eclipsing both the 1929 and 2000 bubble peaks.
The long-term average CAPE for the S&P 500 index is 17. But even if we assume that the CAPE should be 20, that is still 47% lower than today’s CAPE of 38.
So the CAPE is likely to decline to somewhere in the range of 20 to 22. This means that the S&P 500 index is likely to decline 40% to 50% over the next 3 to 5 years.
Warren Buffett, arguably the greatest investor of all time, has raised $325 billion in cash at Berkshire Hathaway. So Buffett clearly thinks that market is overvalued. In fact, Buffett says that total market cap to GNP is “probably the best single measure of where valuations stand at any given moment.” Currently, the total market cap to GNP is 201%, one of its highest levels in history, comparable to December 1999.
When did Buffett last have so much cash as a percentage of Berkshire’s portfolio?
2007 before the Great Financial Crisis
1999-2000 before the internet bubble popped
INFLATION MAY PICK UP AGAIN
The consumer price index (CPI), which measures price growth across a basket of goods, ticked up to an annual pace of 2.6% in October – from 2.4% in September, which had been the slowest rate in more than three years.
Importantly, the 10-year treasury yield has increased from a recent September low of 3.649% to 4.445%. The great macro investor Stanley Druckenmiller said just recently he trusts market prices more than he trusts professors. The 10-year treasury is predicting that inflation will start increasing again, forcing the Fed to stop lowering rates and possibly to start raising rates.
If, in fact, inflation keeps increasing and the Fed has to keep rates high, that would probably be a catalyst for the S&P 500 index to start a 40% to 50% decline over the next 3 to 5 years.
That said, the catalyst for a bear market could be any number of things, including inflation inceasing, a possible recession, or something else the market is not currently considering.
BUBBLE HISTORIAN JEREMYGRANTHAM
As bubble historian Jeremy Grantham notes, there has never been a sustained rally starting from a 38 Shiller P/E. The only bull markets that continued up from levels like this were the last 18 months in Japan 1989 and the U.S. tech bubble of 1998 and 1999. Both of those great bubbles broke spectacularly. Separately, there has also never been a sustained rally starting from full employment.
What happened to the 2021 bubble? It appeared to be bursting conventionally in 2022—in the first half of 2022 the S&P declined more than any first half since 1939 when Europe was entering World War II. As Grantham points out, previously in 2021, the market displayed all the classic signs of a bubble peaking: extreme investor euphoria; a rush to IPO and SPAC; and highly volatile speculative leaders beginning to fall in early 2021, even as blue chips rose enough to carry the whole market higher—a feature unique to the late-stage major bubbles of 1929, 1972, 2000, and now 2021. Grantham writes:
But this historically familiar pattern was interrupted in December 2022 by the launch of ChatGPT and consequent public awareness of a new transformative technology—AI, which seems likely to be every bit as powerful and world-changing as the internet, and quite possibly much more so.
But every technological revolution like this—going back from the internet to telephones, railroads, or canals—has been accompanied by early massive hype and a stock market bubble as investors focus on the ultimate possibilities of the technology, pricing most of the very long-term potential immediately into current market prices. And many such revolutions are in the end often as transformative as those early investors could see and sometimes even more so—but only after a substantial period of disappointment during which the initial bubble bursts. Thus, as the most remarkable example of the tech bubble, Amazon led the speculative market, rising 21 times from the beginning of 1998 to its 1999 peak, only to decline by an almost inconceivable 92% from 2000 to 2002, before inheriting half the retail world!
So it is likely to be with the current AI bubble. But a new bubble within a bubble like this, even one limited to a handful of stocks, is totally unprecedented, so looking at history books may have its limits. But even though, I admit, there is no clear historical analogy to this strange new beast, the best guess is still that this second investment bubble—in AI—will at least temporarily deflate and probably facilitate a more normal ending to the original bubble, which we paused in December 2022 to admire the AI stocks. It also seems likely that the after-effects of interest rate rises and the ridiculous speculation of 2020-2021 and now (November 2023 through today) will eventually end in a recession.
Grantham says to beware of FOMO (fear of missing out), which comes along at the end of every great bubble. It’s incredibly seductive and hard to resist.
This bubble has crossed off all the boxes. It’s done all the things that a super bubble typically does.
We had a 11-year bull market (2009 to 2020), the longest in history.
It requires crazy behavior—we’ve had some of the great crazy behavior of all time.
It needs to accelerate at something like 3x the average rate of the bull market. It has done so.
At the end of every super bubble, the speculative stocks start to peel off and go down (even if the broad market goes up). This has happened. 40% of all NASDAQ stocks are down over 50%. This is the beginning of the end of the bubble: speculative stocks go down even as the market goes up. It’s a very rare condition that only previously happened in 1929, 1972, 2000.
Grantham concludes by asserting:
It is likely that we are at the beginning of a crash.
It would be unlikely that the market would not come down 50% from its peak.
And it would be unusual if the speculative stocks did not do worse than that.
CONCLUSION
Benjamin Graham and David Dodd, in Security Analysis (1934), wrote:
The ‘new era’ doctrine – that ‘good’ stocks were sound investments regardless of how high the price paid for them – was at bottom only a means of rationalizing under the title of ‘investment’ the well-nigh universal capitulation to the gambling fever. The notion that the desirability of a common stock was entirely independent of its price seems incredibly absurd. Yet the new-era theory led directly to this thesis… An alluring corollary of this principle was that making money in the stock market was now the easiest thing in the world. It was only necessary to buy ‘good’ stocks, regardless of price, and then to let nature take her upward course. The results of such a doctrine could not fail to be tragic.
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.
As a long-term value investor, how does one maximize long-term returns? Being hyper-selective – choosing the top 0.1% of ideas – is essential.
But something else that is essential is bet sizing. There’s actually a simple mathematical formula – the Kelly criterion – that tells you exactly how much to bet in order to maximize your long-term returns.
Both Warren Buffett and Charlie Munger are proponents of the essential logic of the Kelly criterion: bet big when you have the odds, otherwise don’t bet. 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).
Some history of the Kelly criterion:
Claude Shannon was a fascinating character–he often rode a unicycle while juggling, and his house was filled with gadgets. Shannon’s master’s thesis was arguably the most important and famous master’s thesis of the twentieth century. In it, he proposed binary digit or bit, as the basic unit of information. A bit could have only two values–0 or 1, which could mean true or false, yes or no, or on or off. This allowed Boolean algebra to represent any logical relationship. This meant that the electrical switch could perform logic functions, which was the practical foundation for all digital circuits and computers.
The mathematician Ed Thorp, a colleague of Shannon’s at MIT, had discovered a way to beat the casinos at blackjack. But Thorp was trying to figure out how to size his blackjack bets as a function of how favorable the odds were. Someone suggested to Thorp that he talk to Shannon about it. Shannon recalled a paper written by a Bell Labs colleague of his, John Kelly, that dealt with this question.
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.
Thorp proceeded to use the Kelly criterion to win quite a bit of money at blackjack, at least until the casinos began taking countermeasures such as cheating dealers, frequent reshuffling, and outright banning. But Thorp realized that the stock market was also partly inefficient, and it was a far larger game.
Thorp launched a hedge fund that searched for little arbitrage situations (pricing discrepancies) involving warrants, options, and convertible bonds. In order to size his positions, Thorp used the Kelly criterion. Thorp evolved his approach over the years as previously profitable strategies were copied. His multi-decade track record was terrific.
Ed Thorp examined Buffett’s career and concluded that Buffett has used the essential logic of the Kelly criterion by concentrating his capital into his best ideas. Buffett’s concentrated value approach has produced an outstanding, unparalleled 66-year track record.
Thorp has made several important points about the Kelly criterion as it applies to long-term value investing. The Kelly criterion was invented to apply to a very long series of bets. Value investing differs because even a concentrated value investing approach will usually have at least 5-8 positions in the portfolio at the same time. Thorp argues that, in this situation, the investor must compare all the current and prospective investments simultaneously on the basis of the Kelly criterion.
In The Dhandho Investor, Mohnish Pabrai gives an example showing how you can use the Kelly criterion on your top 8 ideas, and then normalize the position sizes.
Say you look at your top 8 investment ideas. You use the Kelly criterion on each idea separately to figure out how large the position should be, and this is what you conclude about the ideal bet sizes:
Bet 1 – 80%
Bet 2 – 70%
Bet 3 – 60%
Bet 4 – 55%
Bet 5 – 45%
Bet 6 – 35%
Bet 7 – 30%
Bet 8 – 25%
Of course, that adds up to 400%. Yet for a value investor, especially running a concentrated portfolio of 5-8 positions, it virtually never makes sense to buy stocks on margin. Leverage cannot make a bad investment into a good investment, but it can turn a good investment into a bad investment. So you don’t need any leverage. It’s better to compound at a slightly lower rate than to risk turning a good investment into a bad investment because you lack staying power.
So the next step is simply to normalize the position sizes so that they add up to 100%. Since the original portfolio adds up to 400%, you just divide each position by 4:
Bet 1 – 20%
Bet 2 – 17%
Bet 3 – 15%
Bet 4 – 14%
Bet 5 – 11%
Bet 6 – 9%
Bet 7 – 8%
Bet 8 – 6%
(These percentages are rounded for simplicity.)
As mentioned earlier, if you truly know the odds of each bet in a long series of bets, the Kelly criterion tells you exactly how much to bet on each bet in order to maximize your long-term compounded rate of return. Betting any other amount will lead to lower compound returns. In particular, if you repeatedly bet more than what the Kelly criterion indicates, you eventually will destroy your capital.
It’s nearly always true when investing in a stock that you won’t know the true odds or the true future scenarios. You usually have to make an estimate. Because you never want to bet more than what the Kelly criterion says, it is wise to bet one half or one quarter of what the Kelly criterion says. This is called half-Kelly or quarter-Kelly betting. What is nice about half-Kelly betting is that you will earn three-quarters of the long-term returns of what full Kelly betting would deliver, but with only half the volatility.
So in practice, if there is any uncertainty in your estimates, you want to bet half-Kelly or quarter-Kelly. In the case of a concentrated portfolio of 5-8 stocks, you will frequently end up betting half-Kelly or quarter-Kelly because you are making 5-8 bets at the same time. In Mohnish’s example, you end up betting quarter-Kelly in each position once you’ve normalized the portfolio.
When running the Buffett Partnership, Warren Buffett invested 40% of the partnership in American Express after the stock had been cut in half following the salad oil scandal. American Express had to announce a $60 million loss, a huge hit given its total market capitalization of roughly $150 million at the time. But Buffett determined that the essential business of American Express–travelers’ checks and charge cards–had not been permanently damaged. American Express still had a very valuable moat.
Buffett explained his reasoning in several letters to limited partners:
We might invest up to 40% of our net worth in a single security under conditions coupling an extremely high probability that our facts and reasoning are correct with a very low probability that anything could change the underlying value of the investment.
We are obviously only going to go to 40% in very rare situations–this rarity, of course, is what makes it necessary that we concentrate so heavily, when we see such an opportunity. We probably have had only five or six situations in the nine-year history of the partnerships where we have exceeded 25%. Any such situations are going to have to promise very significant superior performance… They are also going to have to possess such superior qualitative and/or quantitative factors that the chance of serious permanent loss is minimal…
There’s virtually no such thing as a sure bet in the stock market. But there are situations where the odds of winning are very high or where the potential upside is substantial.
One final note: In constructing a concentrated portfolio of 5-8 stocks, if at least some of the positions are non-correlated or even negatively correlated, then the volatility of the overall portfolio can be reduced. Some top investors prefer to have about 15 positions with low correlations. Ray Dalio does this.
Once you get to at least 25 positions, specific correlations typically tend not to be an issue, although some investors may end up concentrating on specific industries. In fact, it often may make sense to concentrate on industries that are deeply out-of-favor.
Mohnish concludes:
…It’s all about the odds. Looking out for mispriced betting opportunities and betting heavily when the odds are overwhelmingly in your favor is the ticket to wealth. It’s all about letting the Kelly Formula dictate the upper bounds of these large bets. Further, because of multiple favorable betting opportunities available in equity markets, the volatility surrounding the Kelly Formula can be naturally tamed while still running a very concentrated portfolio.
In sum, top value investors like Warren Buffett, Charlie Munger, and Mohnish Pabrai–to name just a few out of many–naturally concentrate on their best 5-8 ideas, at least when they’re managing a small enough amount of money. (These days, Berkshire’s portfolio is massive, which makes it much more difficult to concentrate, let alone to find hidden gems among microcap stocks.)
You have to take a humble look at your strategy and your ability before deciding on your level of concentration. The Boole Microcap Fund that I manage is designed to focus on the top 5-8 ideas. This is concentrated enough so that the best performers–whichever stocks they turn out to be–can make a difference to the portfolio. But it is not so concentrated that it misses the best performers. In practice, the best performers very often turn out to be idea #5 or idea #8, rather than idea #1 or idea #2. Many top value investors–including Peter Cundill, Joel Greenblatt, and Mohnish Pabrai–have found this to be true.
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.
Perma-Pipe International Holdings (PPIH) makes specialty pipes which have coatings and linings for various harsh-condition transportation of oil, chemicals, and water. End markets are oil & gas, chemical, and infrastructure. PPIH also makes leak detection systems.
In the company’s most recent quarter, it reported EPS (earnings per share) of $0.40 versus $0.13 in the prior year. Furthermore, PPIH has a backlog of $75.5 million, which does not include $46 million in additional rewards secured subsequent to the end of the quarter.
The company is poised to continue increasing its EPS if they can continue increasing their revenues. This is a real possibility because PPIH provides products and services to Middle East regions that are investing in long-term infrastructure projects.
The market cap is $101.9 million, while enterprise value is $128.0 million.
Here are the metrics of cheapness:
EV/EBITDA = 5.42
P/E = 6.65
P/B = 1.49
P/CF = 6.78
P/S = 0.65
ROE is 28.3%, which is good.
The Piotroski F_Score is 7, which is quite good.
Insider ownership is 11.1%, which is decent. Cash is $9.5 million, while debt $35.5 million. Total liabilities to total assets is 51.9%, which is OK.
Intrinsic value scenarios:
Low case: If there’s a bear market and/or a recession, the stock could decline. That would be a buying opportunity.
Mid case: The company should have a P/E of at least 12. That would mean the stock is worth $23.06, which is about 80% higher than today’s $12.78.
High case: Arguably, the company should have a P/E of 15. That would mean the stock is worth $28.83, which is over 125% higher than today’s $12.78.
Very high case: If PPIH can continue to ramp its revenues, the P/E could reach 20. That would mean the stock is worth $38.44, which is 200% higher than today’s $12.78.
RISKS
If there’s a bear market or a recession, the stock would probably decline.
If the company does not continue to win new business, revenue and earnings would decline.
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.
PCS Edventures! (PCSV) offers a large catalog of STEAM curriculum (Science, Technology, Engineering, Art, and Math) and materials in the United States. Customers are schools and school districts from kindergarten through the collegiate level. Customers also include providers of after-school programs, home-school programs, summer programs, and corporate outreach programs.
PSCV differentiates itself in the very fragmented STEAM education market by being more professional and by providing excellent customer service. Furthermore, the company has demonstrated an ability to create engaging new courseware for kids. For instance, in 2016 PCSV quickly developed an education drone kit and curriculum when the company saw the drone market develeoping. And PCSV was one of the first to create a podcasting for kids curriculum and kit. This capability to speedily adjust and produce content valued by kids has been central to the company’s ability to win market share.
PSCV has many repeat customers. They’ve also been able to win larger orders from government programs such as the U.S. Air Force Junior ROTC.
Although PSCV’s quarter-to-quarter results can be lumpy, they continue to add more customers on a yearly basis.
The market cap is $31.55 million.
Metrics of cheapness:
EV/EBITDA = 6.16
P/E = 6.34
P/B = 3.58
P/CF = 9.75
P/S = 3.28
Normalized ROE is 38%, which is sustainable.
The Piotroski F_Score is 8, which is excellent.
Insider ownership is 61.99%, which is outstanding. Cash is $2.65 million, while debt is only $259k. Total liabilities to total assets is 7.65%, which is superb.
Intrinsic value scenarios:
Low case: If there’s a bear market and/or a recession, the stock could decline. That would be a buying opportunity.
Mid case: The company should have a P/E of at least 12. That would mean the stock is worth $0.47, which is about 90% higher than today’s $0.25.
High case: Arguably, the company should have a P/E of 15. That would mean the stock is worth $0.59, which is over 135% higher than today’s $0.25.
Very high case: The company could maintain its normalized ROE of 38%, in which case the stock could compound for many years.
RISKS
PSCV may not continue to win customers. This seems unlikely but it’s possible.
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.
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.
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, 4th 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:
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.
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.
Zoomd Technologies (ZOMD.V in Canada and ZMDTF over-the-counter) is a marketing technology user-acquisition and engagement platform. “The company operates a mobile app user-acquisition platform that integrates with various digital media outlets. Its platform presents a unified view of various media sources to serve as a comprehensive user acquisition control center for advertisers and streamlines campaign management through a single point of contact. It also offers app marketing services. The company is based in Toronto, Canada.” Source of quote: https://seekingalpha.com/symbol/ZOMD:CA
Mobile media budgets are rapidly expanding, making mobile media devices the primary screen for advertisers’ media expenditures. Consumer spending in mobile apps is expected to continue its upward trend.
Zoomd helps companies navigate the complicated ‘outside the walled gardens’ space, where about half the marketing budget is spent.
Zoomd enables brands to expand globally with the least resources and the greatest impact, offering access to a substantial network of both global and local media channels through a single, unified service provider.
Zoomd is entrusted by global brands with customer acquisition. Zoomd’s top ten clients have been with Zoomd for an average of three years.
Since Q2-2023, under the direction of new CEO Ido Almany, Zoomd has engaged in strategic refocusing and the company’s performance has improved, including net income growth for 5 consecutive quarters and solidly positive net income of $2.27 million in Q2-2024. Also, revenue grew by 60% from Q1-2024 to Q2-2024.
Furthermore, from Q2-2023 to Q2-2024 under the direction of Almany, operating costs as a percentage of revenues have declined from 42% to 21%.
The market cap is $32.01 million, while enterprise value is $31.24 million.
Metrics of cheapness:
EV/EBITDA = 5.86
P/E = 11.09
P/B = 2.86
P/CF = 9.28
P/S = 0.94
ROE is 23.49%. This appears to be sustainable.
The Piotroski F_Score is 6, which is decent.
Insider ownership is 22.95%, which is excellent. Cash is $4.39 million, while debt is $3.63 million. Total liabilities to total assets is 47.6%, which is pretty good.
Intrinsic value scenarios:
Low case: If there’s a bear market or a recession and/or if demand for the company’s products decreases, the stock could decline.
Mid case: Annual EPS could reach at least $0.09 if the most recent quarter’s net income is matched or exceeded. With a P/E of 10, the stock would be worth $0.90 per share, which is 170% higher than today’s $0.3328 share price.
High case: The company’s performance could continue to improve. Annual EPS could reach $0.12. With a P/E of 12, the stock would be worth $1.44 per share, which is 330% higher than today’s $03328.
RISKS
Customer concentration: The company’s top 10 customers represent the vast majority of the revenues.
Increasing competition and emerging technological changes could challenge Zoomd’s ability to stay relevant and to capture new customers.
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.
Journey Energy is a Canadian oil and gas producer that is also becoming a significant producer of electric power. Journey’s stock is extremely cheap and the company is poised for significant growth in 2025.
The CEO Alex Verge has a long history of creating value in the oil and gas industry. And he has bought a great deal of Journey Energy stock on the open market.
The market cap is $109.7 million, while enterprise value is $143.4 million.
Metrics of cheapness:
EV/EBITDA = 3.04
P/E = 9.34
P/B = 0.46
P/CF = 1.86
P/S = 0.73
(The P/E is based on forward earnings.)
ROE is 3.85% but will increase in 2025.
The Piotroski F_Score is 5, which is OK. This also will likely improve in 2025.
Insider ownership is 7.6%, which is solid. Cash is $18.91 million, while debt is $64.29 million, almost all of which is due in 2029. Total liabilities to total assets is 46.4%, which is decent.
Intrinsic value scenarios:
Low case: If there’s a bear market or a recession and/or if oil prices decline, the stock could decline. This would be a buying opportunity.
Mid case: NAV based only on proved developed producing assets is $3.70 per share, which is 105% higher than the current stock price of $1.80 per share.
High case: EV/EBITDA today is 3.04 but should be approximately 8.00. That would mean an enterprise value of $377.37 million or a market cap of $343.67 million. This means an intrinsic value of $5.64 per share, which is over 210% higher than today’s $1.80.
RISKS
If there’s a bear market or a recession, the stock could decline temporarily.
Oil prices may even decline.
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.
