Thinking vs doing

It's not often that one sees a limo for sale, especially on someone's front lawn with a price tag of $2,500.  The limo wasn't new, it was a late 1980s model, but it was still a limo.  I used to drive past that limo weekly when I was in college.  I was intrigued, I had the money to buy it, and there were so many things I could do with a limo.  Eventually my daydreaming led me to what I thought was a brilliant idea.  I would buy the limo and start a late night taxi service.  Who wouldn't want to be picked up in a limo after a night in the bars and taken home in luxury?  I thought the idea was great, my friends thought it was great, everyone thought I was onto something.  The problem is I never bought the limo, I just talked about it.  Eventually the limo was sold and the dream died.

Everyone has ideas.  Almost everyone has a few innovative ideas.  Many have completely unique ideas.  Very few act on any of their ideas.  Most ideas are like my limo, they sound great, friends love them but they never move beyond a daydream.

I'm the firstborn of my brothers and I tend to be a perfectionist, or at least I desire perfection.  It's a firstborn trait (all firstborns are nodding in agreement right now.)  The problem is perfection can never be achieved.  My usual course of action would be to come up with an idea and then start to think about the implementation.  I either would get lost in the details or I'd begin to work on it and would stop when I realized I couldn't complete it perfectly.  My perfectionism was holding me back.

The problem is I'd never start on anything, or if I started I couldn't complete anything.  I had dozens of half started projects laying around to never be completed.  I could come up with incredible ideas, but execution and follow through were nonexistent.

Many of you are probably living the experience I did for years.  You have great ideas and poor execution.  Maybe you start to never finish, or you finish and are so disappointed with the results you never try again.

So what was my breakthrough?  There wasn't one specific moment in time, but a variety of small experiences.  The first was writing this blog.  I could take an investment idea, detail it for the future and act on it.  Each time I wrote up a company I took action on an idea.  Having written out my thoughts helped me take action and invest as well.

The bigger breakthrough was a home improvement project I undertook in 2011.  The basement was authentic to the 1940s, cinderblock walls and a cold uneven cement floor.  We decided we'd like a little more space and because I hate paying for things I can do myself I decided to build the basement myself.  Over the course of six months working an two to three hours at night after my wife and son went to bed I finished the basement into a very usable space.  I put up a ceiling, walls, wired outlets, lights, everything.  Complicating the project is the basement floor isn't flat, every 2x4 in the room  had to be custom measured and cut.  But slowly, night by night I made progress.  Some nights it was hard to tell I did anything.  Other nights I'd finish a wall or hit a significant milestone.  But regardless I kept pushing forward.  I created a habit by working on the project consistently, and completed the basement.

There were times during the build that I doubted what I was doing and worried about getting things just right.  But I kept reassuring myself that with construction any mistakes could be fixed.  Either by repairing, or destroying and rebuilding again.  Thankfully I didn't have to make any major changes, but just knowing in the back of my mind I could if I needed to helped me push forward and finish.

Finishing the basement gave me continued motivation to write on this blog, and start a business.  CompleteBankData started out as a germ of an idea, and through a continued habit of slow consistent work we produced a completed tool.  This past year I launched the Oddball Stocks Newsletter and built a new yet to be released iteration of CompleteBankData.  All of these projects loomed large and seemed impossible before they were started.  But by taking them a small step at a time I was able to accomplish things I never thought possible a few years ago.

By taking consistent steps forward towards a goal I was able to break through the fear of not finishing.  I'd like to think I've finally moved from never finishing to always finishing.

No matter what the task there is always ambiguity.  We never know ahead of time how things will work out.  But the only way to find out is to give it a try and move forward.  In trying new things we learn a lot about ourselves.  Over the past four years I've discovered strengths I never knew I had as well as discovered some areas where I need improvement.

There is probably an area in your life where you keep thinking about taking action but haven't yet.  Maybe it's fear of the unknown, or fear of not knowing all the details, or fear of not finishing.  Maybe it's time to stop researching an investment and finally invest.  Or maybe it's time to stop thinking about a new job and go find one.  Or time to start a business you've been thinking about for years.  I don't know what it is for you.  I know for myself I have an exciting set of projects that I'd like to complete in 2015.  I don't know how many will be successful, but I do know that everything I start I'll finish.

It's time to go out and get started...

HMG/Courtland Properties, a pile of cash, securities, and real estate for 52% of book value

All value investors are supposedly looking for the proverbial dollar trading for fifty cents.  How one defines a dollar and fifty cents differs greatly, but in theory we're all looking for the same thing, a discount.

Investing in assets at a discount is akin to swimming in the baby pool of investing.  An investor identifies an asset, determines their value, invests at a discount and waits patiently.  You don't need to be an professional swimmer to be in the baby pool, and you don't need to be a professional investor to invest in asset mis-valuations.  Asset mis-valuations are simple to analyze and if an investor is correct with their valuation and buys at a discount they will do well given time.

Even though some investors are satisfied to spend their whole career investing in simple investments most aren't.  Professional investors don't want to stagnate, they challenge themselves to learn new industries and more advanced analytic techniques.  Retail investors tend to mimic professionals.  If professionals are investing in distressed debt, free cash flow yielders and companies with moats then when professionals talk about investing they'll discuss these types of investments leading retail investors to believe this is the only way to invest.

In many ways it's a shame that investors neglect simple and easy investments to chase the complicated and popular investments that are all over the financial media.  The company in this post is neither complicated or exciting, but it could offer investors an attractive return.

HMG/Courtland Properties (HMG.NYSE) is a publicly traded REIT.  The company consists of cash, investment securities, and various investment interests in real estate ventures.  Most importantly they have a market cap of $12m against a book value of $23m.  The company trades for 52% of book value.

The company doesn't have much in the way of earnings.  They have a very small stream of revenue related to an office building they own.  Their other income consists of gains from marketable securities, dividends from those same securities, and income from other real estate ventures.  Whereas income is volatile their expenses are not.  The REIT pays an advisor to 'manage' the investments, they also pay directors lavishly and have other real estate related operating expenses.  For being such a simple operation their expenses are not all that low.

What an investor is purchasing when they buy HMG/Courtland is essentially a managed real estate fund at a discount.  The key to an investment is the quality of the assets being purchased.

Starting from the company's most liquid asset to least they have $6.5m in cash and $11.6m in marketable securities.  The marketable securities consist of traded REIT stocks and traded REIT preferred shares.  No single REIT position is larger than $400k.  This means the company's portfolio owns about 28 individual positions.

The company also has a direct ownership interest in an office building worth $797k that generates roughly $85k in rental income.  Besides their office building they own stakes in various partnerships, affiliates and a note receivable.

In terms of liabilities HMG/Courtland Properties owes $2.4m to an affiliate and has $200k in accounts payable.  The market is valuing the company for $3m less than net cash and investments.  At this level an investor gets an office building and the investments in private real estate development for free.

The problem with the investment is that their operating income doesn't cover their operating expenses.  The company is reliant on gains from marketable securities, dividends from securities and dividends from joint ventures to meet expenses.  If any of those income sources drops for a period of time the company will be operating at a loss and be reliant on using their cash and securities to operate.  When companies survive off of their assets for an extended period of time the investment is affectionately known as a melting ice cube.  In a situation like this an investor is making a bet against time.  The bet being that the market will value the company higher before the company's asset value erodes to market value.

An investor's best bet at outrunning the melting ice cube scenario is the HMG/Courtland's investment into new real estate development.  At present the company has agreed to commit $1.8m for a one third ownership interest in a new joint venture.  The joint venture plans to build and develop 250 condos on 9.5 acres in the Orlando, FL area.  Each partner in the project will contribute $1.8m and the entity plans to raise an additional $27m in financing to complete the development.  When completed HMG/Courtland will either receive dividends as a result of rental income, or sell their stake.

The company has had success in the past developing properties and then selling them.  In 2013 they sold their interest in Grove Isle Yacht Club for $24.4m for a gain of $19m.  If they are able to do it again their investment in Florida condos might turn out to be just as lucrative.

An investment in HMG/Courtland is a bet on their ability to turn their real estate investment interests into considerable gains.  If they don't an investor is well protected by the company's cash and securities.  The big question is whether management can turn the condos into cash before they burn through their assets.

Disclosure: No position

Solitron and mis-management shenanigans

When you were a kid what would happen when your parent asked you to do something reasonable and instead of obeying you looked them in the eyes and said "No, you're worthless, I'm not listening to you, I'm doing my own thing"?  Maybe yelled at, scolded, spanked, or for the younger set given a 'time-out' or told to sit in a 'naughty seat'.  Those are expected outcomes.  Across societies respecting elders and parents is expected behavior.  Unfortunately in the real world when the elder is a shareholder, the legal owner of the company, management suddenly loses respect.

I've discussed Solitron Devices (SODI) at length on this blog in the past.  A Google search reveals 101 references, see here for yourself.  The back of the napkin summary is they are a small electronics manufacturing company selling at a discount to almost anything with stubborn management.  I first discovered them as a net-net.  I ended up getting somewhat engaged with the company talking to management and trying to convince them to pay a dividend.  I also helped rally shareholders into forcing the company to hold a legally required annual meeting in 2013.

Solitron is like many public companies, they have a very valuable asset and then something either masking it or blocking that asset from realizing its full potential.  Solitron has a slightly valuable operating business and a pile of cash stuffed into Treasury notes.  The company could easily pay out the majority of their market cap as a dividend without having any effect on their day-to-day operations.  Yet the company won't.

Even though shareholders legally own a company there is a problem in America with publicly held companies.  Common men and women when promoted to the highest office of a company suddenly forget shareholders exist and start to believe the company is theirs.  Just because someone holds a given title doesn't mean they can usurp the legal rights of shareholders.

Tim Eriksen of Eriksen Capital Management wrote a letter to Solitron management that was filed with the SEC today.  The letter summarizes how many shareholders feel.  Shareholders voted out directors only to see company management reinstate them.  The directors that shareholders (the owners) deemed unsatisfactory by a large margin are somehow acceptable to management.  To me this speaks volumes about the quality of Solitron's management.  The truth is Solitron doesn't really have management in a plural term, they have a sort of dictator leader named Shevach Saraf.  He claims almost all important titles to himself and appears to be a one man show running the place.  It's Saraf's way or the highway.

I am clearly frustrated with the company and in some ways disgusted.  The fact that Saraf has the audacity to completely ignore shareholders shows his opinion of us.  What Saraf doesn't realize is that while he's a kid bragging about the size of his castle on shareholder beach the shareholders are the ones with the bulldozer.  And it's time to fire that thing up and use it.

In the past I've advocated voting out Board members but keeping Saraf.  I'm changing my position, Saraf needs to go.  He needs to go peacefully or forcefully.  He only owns 30% of the company, and most of the other 70% is well represented among my readers.  It's time to vote him out and when he fails to leave force him out through the courts if necessary.

If shareholders acted as childishly as Saraf we'd be booking flights to Florida to TP and egg the company's headquarters.  But shareholders are respectful, unlike Saraf.  We've tried to assert our control through legal means only to be ignored.  I think it's time to step up the pressure.

I want to end this post with some quotes from Tim's letter to the company:

"As a reminder, the company had improperly, and as far as I can tell illegally, neglected to hold an annual meeting for over ten years. Finally a shareholder filed suit, which led to the board holding an annual meeting in 2013. At that meeting, shareholders rejected two of the company’s four board nominees. Management responded by reappointing one of those nominees anyway. At the 2014 annual meeting, shareholders rejected the board’s sole nominee. How often does a board lose uncontested elections? After the 2014 meeting some of Solitron’s larger shareholders reached out to the company and submitted potential candidates. The board ignored them all."

"To add further insult to injury, on November 26, 2014 CEO/President/CFO/Treasurer/Board Chairman Shevach Saraf certified an inaccurate filing with OTC Markets. In that filing he neglected to include Eriksen Capital Management among the list of 5% shareholders. Eriksen Capital Management had filed a 13D with the SEC more than three months prior, on August 7, 2014. How was Mr. Saraf unaware of who the owners of the company were? It takes less than a minute to find the information on the SEC Edgar website."

"What is obvious is that there is a board problem and a management problem at Solitron. Instead of using your time and energy to try and entrench yourself, we think management and the Board should meet with large shareholders and work to improve the company’s future. To that end we intend to submit proposals for the 2015 annual meeting to:

1. approve an amendment to declassify the board of directors, 
2. to nominate two directors in opposition to Solitron’s two nominees, 
3. to increase the board size to seven directors, 
4. to elect additional directors to fill the newly created directorships, and 
5. to repeal any and all changes to the bylaws subsequent to the date of this letter, up through the time of the annual meeting."

Disclosure: Long SODI

Investing consistency

I enjoy running, maybe something inside me is mis-wired, but I truly enjoy running outside, even in the cold.  I'm competitive and enjoy pushing myself and will occasionally entering a race.  It's fun to compete in a race and try to set a personal best.  I've had races where my times were abnormally good.  Everything was perfect that day, the weather was crisp, the course flat, competition a good match, and I was feeling good.  The race went perfectly and I achieved a time that was unrepeatable, at least until events line up perfectly again.  If you race enough you'll have more than one perfect day, maybe a handful, maybe a few dozen.

Anytime I ran a perfect race I knew it.  I could feel that what I had just accomplished was unlikely to be repeated soon.  I would enjoy my personal best, but in my mind it was always hedged with the thought that I couldn't really do it again, or maybe I didn't quite earn it.

In running like most sports the path to success is consistent practice over a period of time.  You don't train for a race by running haphazard varying speeds during practice.  You build up both time and distance with practice.  Consistently hitting goals in practice results in predictable race times.  If I could run five or six miles daily at a seven minute a mile pace I knew I could run a 5k at a 6-6:30 pace (note I said above I like to run, not that I'm fast.)  My race outcomes were predictable because I had a repeatable practice process, and in practice I ran consistently.

When I think of investment returns the parallel to my running experience comes to mind.  It's possible to have a few fluke races (abnormal years), but if you don't have a consistent process or a repeatable process you won't have any assurance that you'll consistently outperform the market.

Wall Street loves high flying managers and highly successful individual investors.  The financial media complex loves volatility.  A manager who beats the market by 30% one year then trails by 10% sells lots of articles.  Investors love these stories too.  They either evoke envy and a desire to do better, or feeling of accomplishment for not doing as poorly.  The problem is that as investors constantly read read articles like this they begin to think this is what normal investing looks like.  A few great years followed by a minor blow up with a spectacular recovery and then another year or two of underperformance for a record that barely beats the benchmark.  A strategy like this will get you on the front cover of magazines, but it won't build wealth over the long term without either a lot of antacid, or resilience.

I sometimes wonder about Bernie Madoff's investors.  Madoff's ploy was brilliant, a fund that returns 12% annually forever.  A lot of investors, especially recently would scoffing at Madoff's measly 12%.  But this was 12% forever without down years compounding into eternity.  Of course it was a fraud, but the return is what fascinates me.  I'd think it'd be easier to deceive investors by having a few big up years followed by a down year that gives the paper gains and more back.  That way you could just adjust performance for how much investor money remains after most of it is spent.  Yet that's not how it worked.  Madoff's investors were usually successful individuals who understood the magic of compounding.  To these investors consistent results were highly valued, valued above any other strategy.

One of the secrets of investing is that avoiding losses and slightly above average returns beats a volatile return profile with both high highs and low lows.  I consider this a secret because most investors forget the market can fall fast.  The majority of the time stocks are in a bull market with brief downturns, but if one isn't prepared a downturn can take away years of gains or more.

Over the past two years I've heard a number of investors say they are searching for stocks that double or triple in three years.  I believe this was first popularized by Mohnish Pabrai, a value investor who looks for the same thing.  Many of these investors have done well for themselves, but not consistently.  Some stocks do return 2-3x or more in a short period of time, while others fail to do so. Often the large gains from a few stocks are enough to counteract the losses and the portfolio beats the market.  While many of these investors are looking for 2x-3x gains their portfolios are only appreciating at 20-30%.

Long time readers are aware that my goal isn't to set individual year records with my portfolio performance.  Instead I strive for investing consistency like I do with my running.

To achieve consistency in investing one needs to first know what they're looking for.  I look for undervalued stocks by either assets or earnings.  I will buy a growing company if there is a true undervaluation present.  Secondly an investor needs to know how well they've done in the past.  If I say that I like to buy stocks at 50% of private market value implying a 100% return then I should check my statements to see what my success rate at picking these stocks is.  And lastly if I have been successful with this in the past I need to develop a repeatable process that I can use again in the future.  The success and repeatability of a strategy is measured through market cycles.  I haven't been investing through many cycles myself, but the style I use has been tested since the 1930s.

When I find a new stock I ask myself "how is this undervalued?"  If I can't answer it in a way that fits my investment style then I usually take a pass.  That doesn't mean it's a bad investment.  It just means it doesn't fit into my process, my path to generating consistent results.

For me the key is that I believe it's much easier to consistently find stocks at a 50% discount to private market value rather than finding stocks blast off like a rocket and appreciate 2-3-5-10-100 times.  It's not to say that I don't stumble on those gems, I have, and plan to in the future as well.  It's that it's easier to consistently find simpler mis-valuations.  And if I can build a portfolio of simple mis-valuations I can somewhat estimate my future returns.  Just like in running where my practice determines my race times in investing our process and the consistent application of it generates our returns.

The problem with a strategy like this is it doesn't get a face on a magazine cover, and it isn't attention grabbing.  For many years it's boring and it really only pays off after years of compounding.

I don't believe my 'brand' of value investing is what's right for everyone, but I strongly believe in the theme of this post.  Everyone needs to find the style of investment that they're good at, and instead of shooting for the stars look for places where consistent returns can be earned with a small potential for loss.