When is value realized?

If you've been reading this blog for a while you know that I tend to cover a wide variety of stocks ranging from global net-net's to European small caps to unlisted American shares.  I really enjoy looking at unlisted companies in the US and I wanted to address something I've been asked multiple times regarding unlisted stocks; when will value be realized and how?

When will value be realized?

The biggest concern I think most readers have with unlisted stocks is that they'll buy into a company and then their money is "stuck" and they'll be unable to liquidate their position when they want, or at a good price.  The fear is even stronger when the company has a strong insider ownership, many readers feel like they'd be locking up their money eternally.

These are perfectly valid fears especially for an investment professional who's performance is graded on a yearly basis.  An individual investor's performance isn't graded on such a short time window, but most individual's have patience that lasts about two years at the most.

Warren Buffett talks about selecting companies that investors would be happy to own if the market was closed for 10 years or more.  I know a lot of people theoretically agree with the statement, but I doubt many people would actually commit to buying a stock if they knew they couldn't sell it for 10 years or more.

I did a very unscientific study using the two Walkers Manuals (discussed below) that I have. I own a copy of the Unlisted Stocks manual, and the 2nd edition of the Penny Stocks manual.  For this simple experiment I just looked at whether a company was tradable and had shares trade in the last year, at the time of writing all of the stocks in both books were trading.  The idea behind this is to get an idea of what a holding lifespan might be for some of these stocks.  Here are the results.

Unlisted stocks from 2003 (9 years)

Out of 400 listed companies 206 are still tradable.
48.5% of the unlisted stocks had some sort of value realization event either positive or negative.

Penny stocks from 1999 (13 years)

Out of 167 listed companies 63 are still listed.
62.2% of the penny stocks had some sort of value realization event either positive or negative.

The results are interesting, it would seem that an investor who wants an external event to realize value would be better served buying exchange traded stocks and avoiding unlisted and pink sheet stocks altogether.

So what are some of the ways value was realized for these companies?  I didn't follow up on all of the companies that I had marked as no longer trading, it would have taken too much time.  I did follow up on some, of the 194 I probably followed up on 30-40 companies.  Most of the time I found their fate through a simple Google search.  Here are some of the terms I jotted down in relation to their final fate: liquidated, bought out, went private, bankrupt, purchased by parent.

An example

One company that I think encapsulates the unlisted stock spirit, and at times absurd valuation and value realization is Western Lime (WLIC).  When Walkers dug up this company in 2003 they were trading for $721 a share and described as a company who was engaged in the manufacture and sale of various lime products.  The manual had the P/BV at 33% with book value per share at $2171.  Book value had grown from $1681 in 1998.  Western Lime would have probably caught the eye of a value investor back in 2003.  It would have also attracted the skeptic who would have said that the discount to book was permanent due to illiquidity or insider ownership or the way the stars aligned in October.

Western Lime's shares rose from $721 to around $6000 a share in 2008.  I don't have details for the intermediate period, but they did eventually rise to book value and above.  This is where things get interesting, the price languished for the next two years before jumping to $12,000 on the news they were going to be acquired.  The company was acquired for $25,000 a share in March 2012.  Even the person who purchased at $12,000 doubled their money!

Maybe Western Lime is an extreme case, over the past 9 years they grew at a 48% compounded rate due to the buyout.  If the buyout never happened and they were still trading at $8000 that would be a 30% compounded growth rate.

Even a 30% annual rate of return seems incredibly high, but it's not and here's why.  While Western Lime was only earning 8.72% on it's equity an investor buying at a 67% discount to book was earning 26% on their investment.  Over the ensuing nine years Western Lime continued to execute as they had in the past.  The investor buying at such an extreme discount was able to realize a consistently high rate of return.  You don't need to buy a great business that compounds at high rates, just a consistent business at a considerable discount.

Here's the longest chart I could find for Western Lime, if anyone has a longer chart email me and I'll replace this one:

Edit: A reader sent me an updated chart, WLIC opened at $29 a share and sold for $25,000 a share, almost a 1,000 fold gain, truly incredible.  A big thanks to the reader for the following chart.

Side note on finding unlisted stocks

A close followup to the first question I've received is how do I find these companies?  There was a publication called the Walkers Manual that compiled unlisted and penny stocks into a book format yearly.  The authors had a value bent, and a talent for finding peculiar and unusual stocks.  The company that published the book went out of business sometime in the middle of the decade and the 2003 edition of the Unlisted Stocks manual is the latest copy.

I purchased both of my copies used on Amazon, and they're old library editions.  The supply appears low on Amazon, but it was never that high to begin with.  When I purchased my copies there were only a few used editions available.

If you can't locate a used copy for sale the next best place to look is the public library.  I did a search in the library system near where I live and multiple locations have the Walker Manuals from differing years.  You can't mark up a library copy (well maybe you can, no one else will probably ever look at these books), but the information is available.

A second way to find unlisted stocks is by screening at otcmarkets.com.  They have a very basic screener where you can specify the type of listing.  Use the tab "Caveat Emptor Securities" and then search for "No Information" "Limited" and "Grey Market" securities.  These are the companies where you'll need to put in a lot of work to get information.  Most of the time the companies are marginal, but every once in a while you find a Western Lime.  You don't need to find too many Western Limes to do well for yourself.

Talk to Nate

Disclosure: Wish I would have owned Western Lime...


  1. Have you looked at Mergents Manuals?

    1. I have, but it seemed most of the companies in there were SEC reporting companies. The format is also a bit difficult to dig through.

      Do you think they're worth the time/money?

    2. I have no idea, I am trying to work out the same thing. What manual did you read? For example, http://www.mergent.com/productsServices-print-unlistedManual.html ??? They were the only place still doing this kind of stuff that I could find.

    3. Yeah, the unlisted manual. If you google for Mergent Unlisted you can get PDF excerpts like this one: http://www.mergent.com/documents/UNL_NEWS2_206.pdf

      I'd imagine the whole manual is like that. I just took a sampling of the companies listed there and put them into EDGAR, they all came back with filings. I'm guessing that's where Mergent is getting their information from.

      I don't think anyone is actually compiling information on the actual unlisted companies commercially. I guess as a bit of a preview, I've been working on something like this myself. I'm putting together a database of financials for these impossible to find information on companies. Hopefully I'll have something usable soon. I'm essentially doing a digital Walkers Manual.


    4. Ah interesting, I am not sure that is the actual manual. I know that in addition to the manual they send out news reports which updates any changes and that may be what that is. There is a 2008 version of the unlisted manual for $10 on amazon (I live outside the US and I haven't been able to get the unlisted one locally) and they also have "look inside" for their main handbook which is quite different (if you look at page 5a). I don't know if that is the same for the unlisted one although the description on the website would suggest it is similar (I don't think they have trading info). I believe they are based on the old Moody's layout anyway.

      I think a lot of people would be interested in that sort of thing, these small companies are always pretty interesting.

  2. Hi Nate,

    How important do you think moats/competitive advantages are when considering investment in unlisted companies?

    For example, Buffett's "ten year stock market closure" scenario is an interesting thought experiment but I doubt he is imagining doing this with a company with no real competitive advantage and/or conditions of high inflation.

    A net-net, especially a cash heavy net-net, would see much of its value evaporate under that condition.

    Similarly, a company trading at a discount to book that has an asset heavy balance sheet might find its replacement cost for its assets has risen significantly ten years later, eating up the supposed discount that existed.

    Do you think you can "blindly" buy undervalued, unlisted companies or are there some important assumptions built into this strategy such as those I've mentioned above?

    That's probably one of my biggest fears with something like this-- buying a company that is clearly undervalued in normal, even normal cyclical, conditions, planning to hold it as long as necessary for a positive revaluation event, only to get run over by an inflationary freight train five or ten years out.

    Somewhat related: what do you think of "buy-and-hold-forever"?

    Are there any examples of businesses that have been worth holding that long (literally... forever, their entire history as businesses, assuming you could buy at the right price early on)? Is it possible to manage a company such that 1000 years from now, it'd still be worth holding?

    The only type of business I can think of that would have that potential would be a business that simply allocates capital to the best, underpriced business available via a holding company structure, ie, something like Berkshire. That could qualify as an "eternal firm." But even then, I am not sure Berkshire IS that firm.

    1. Taylor,

      Good comment with some really good questions. I guess to start off I'm not a big believer in competitive advantages and moats. I think those are great things when they exist, but I think investors tend to see them where they aren't. If you read blogs or analyst reports it seems as if almost every company has a moat or some competitive advantage. My view is most companies are average, some are poor and some are above average. For a company to remain above average they need to have some advantage that prevents competition, a monopoly position. I think of companies like Visa and Mastercard, they really control the payment market and they have enough money to squash a new competitor through legislation or by changing the rules of the game.

      So with that said I don't think you need a competitive advantage to operate an average business successfully for years. Yes you'll never earn 20-30% returns on equity, but you don't need that for a solid living either. Step back from Wall Street and think about local businesses. Most small companies have no advantages, what they have is relationships. Relationships are how business gets done on Main Street. So you have the President of a manufacturing company who knows all the other business leaders through the Kiwanis or Rotary Club. Other companies do business with his because they like him, they could easily switch to a competitor but there is an intangible relationship which is valuable.

      There are many family businesses which are owned for generations that are completely average businesses yet they continue to prosper. There's a grocery store chain where I live that's massive, it's owned and run by the same family that started it. A grocery store is the ultimate average business, yet this company has found a way to thrive. It's doing the everyday things slightly better than the competition in my mind.

      One other thing worth mentioning is that most companies with "moats" have competitors and upstarts constantly trying to get into the market because the returns are so good. Usually these companies end up failing due to a disruptive technology shift. Most average businesses will have roughly the same competition in the future as they've had in the past, so we can forecast a bit easier. Additionally a lot of average businesses are in mature industries where the risk of disruptive change is still real, but not as urgent. A company that cans food isn't glamorous, but it'll be a long time before canned food disappears.

      So with all this said the key to owning something long term is buying at the right price. Buying an average business at full price is a guarantee for average or below average returns. Buying an average business at a very low and attractive price can give returns that far exceed what you'd get by buying a great business at a good price.

      I'm not sold on a buy and hold forever, I sell quickly if I need to. If I buy a company at a great entry price, and they continue to execute as I expected them to I will hold. My longest holding is 10 years, my second longest is 6 years. Nothing mind blowing there either. The prospect of holding a company for 15 years isn't all that terrible for me. I have mentioned in the past I don't concentrate so one position might only be 3-5%. Having 5% tied up in one company for 15 years that's continuing to compound on my original investment is acceptable to me.

      I don't know if there's any business I'd actually hold forever. I read recently that the lifespan of an organization if 45 years. Looking at the composition of the Dow from 1967 seems to confirm this view. A few companies are still around but not many. Looking back 50 or 60 years even confirms it further.

      Hopefully this helps answer your questions.


    2. Amen to that. I was once a trainee at one small consulting office which was doing M&A advisory for micro companies. These were companies were average "mom and pops" which had been making business for last 50 years. They didn't have any text book moats but still they were making the owners very rich. It was all about the reputation and personal relationships as Nate mentioned.

      Ofcourse, because they were "average" businesses they were also selling at "average" multiples. So, if you can find decent company (ie. no moat but still succesfull) with undecent price, there is good change of becoming succesfull.

    3. Btw, one of Greenwald's points is that, if you look at competition along a geographic continuum, local is always strategically stronger than global. Thus, is slogan, "All competition is local." (Kind of like how Austrian economists might say, "All economics is micro.")

      That might explain part of the dynamics you're witnessing with small businesses operating in local markets.

    4. Yeah, the basic "Greenwald/Porter" principless are exactly the same at local small business level. Good reputation could be thought as "brand power" etc.

      Because with small busineses operations are so tied to the owners they become extremely difficult to sell. Depending of the industry quite a lot but it is possible that when the orginal owner is gone nobody is doing business with the company anymore. Strong "community feel" between the entreprenaurs in local (town) level you have to earn your place before you can operate effectively.

  3. There are not many companies that have been good investments for a 30 year stretch, or a lifetime.

    Look at General Motors!

    However, I can think of two that have been very good investments for 50+ years. Philip Morris and Coca Cola.

    Philip Morris has paid out TREMENDOUS dividends that could have been used to buy more stock OR to buy other companies.

  4. Hi Nate,

    Yes, it does. But I was curious about your thoughts on the threat of inflation as it relates to this question, as well (ie, you buy an unlisted, illiquid company with no competitive advantage and then we get a bout of high inflation like the 70s).

    I think you can buy-and-hold-forever potentially if you buy a control/majority position at a great valuation. Then, every additional year you own the asset, assuming the general business conditions are unchanged and you don't have something better to buy, past the payback period, is gravy.

    But devoid of meaningful context, BAHF is an idiotic strategy. Nothing lasts forever. The only constant in competitive markets is change.

    Have you read the Greenwald literature on competition and barriers to entry?

  5. I would like to say something about Western Lime's. The stock went from 750 to 6000 dollars a share. I bought a company called seaboard. The stock had very low volume and traded around 180 dollars a share. I bought the stock years ago and sold it some time ago for 2500. Just because a stock trades at a very high price does not mean that it is not a good value.

  6. I currently hold Just Car Clinics ( JCR.L ). The shares were listed in London and I bought in on the delisting announcement when the share price tanked. They are basically a panel beater which I picked up at around 2.2X 5 year average PTP.

    I've held them or nearly a year. There's a matched bargain system in place but I prefer to keep holding the shares and receive my near 12% annual divi. :O)