Geoff Gannon October 12, 2006

20 Questions for George of Fat Pitch Financials

George has been active individual investor for 15 years, but only “saw the light” of value investing five years ago. He is the author of Fat Pitch Financials, a value investing blog inspired by the writings of Warren Buffett. One of the most popular features at Fat Pitch Financials is an exclusive detailed list of current going private transactions that is made available to members of the site.

1. Are you a value investor?

Yes, I’m a value investor. My investment philosophy is closely aligned to Warren Buffett’s. I look for wide moat companies selling at a price that provides a margin of safety. While I wait for those opportunities, I also invest in risk arbitrage and special situation opportunities.

2. What is value investing?

Value investing in my book is investing with a particular emphasis on intrinsic value. I view the intrinsic value of a company as the amount of money a rational person should be willing to pay for a company if it is viewed solely as a money printing machine. Value investing is then just the process of finding money printing machines that are selling for less than the present value of the future money that they will print. The key is buying the opportunities at a discount sufficient to provide a margin of safety.

3. What is your approach to investing?

My approach to investing involves breaking the process down into different components. I do a ton of reading to identify potential opportunities, especially those that appear to be giving a company a sustainable competitive advantage. I also run some fundamental stock screens to identify potential investment candidates. Then I usually run a preliminary analysis using my Fat Pitch Finder spreadsheet. If the numbers look acceptable, I then dig into the various SEC regulatory filings for that company. I look for corporate governance issues, competitive weaknesses, and hidden liabilities. Finally, I create a more refined intrinsic value analysis and determine my margin of safety for that stock. If the price of the stock is trading below my margin of safety, I buy it.

I also have created an elaborate system for scanning SEC filings for special situation opportunities. I then track them using Fat Pitch Financials Contributor’s Corner. These opportunities are assigned phases or stages and I also calculate their potential percent gain. I then determine the “expected” payout adjusted for risk of each opportunity and select the best options.

4. How do you evaluate a stock?

I avoid just evaluating a stock, but instead I try to focus on the business and its management. I determine the competitive position of the business, the reliability of management, and finally I estimate the intrinsic value of the business.

5. Why do you buy a stock?

I buy a stock when it is selling for a price that provides for a significant margin of safety and its business has a wide moat.

6. Why do you sell a stock?

I sell a stock when it becomes significantly overvalued and/or its moat narrows. I also sell when I discover that I have made a mistake or when it appears management is going to run away with the castle’s treasure.

7. What investment decision are you most proud of?

I’m pretty proud of the fact that I stuck with Merck (MRK) even after the negative feedback.

I’m also very proud of my decision to figure out a way that individual investors could also participate in arbitrage and special situations. Hedge funds were all the rage these past few years. I knew that some of them were taking advantage of opportunities that Warren Buffett has referenced on occasion about special situations. After some research and experimenting, I discovered that going private transactions involving reverse splits provide great opportunities for small investors.

8. What investment decision do you most regret?

I’m not sure if it is my biggest regret, but my recent purchase of Parlux Fragrances (PARL) was not a moment that I was proud of. I really should have been more patient with this special situation opportunity and I should have sold immediately when management reneged on their going private proposal.

9. Why do you blog?

I started off blogging because I didn’t want to continue paying for posting in stock forums. I believe writing and taking feedback really sharpens your focus when researching investment opportunities. Most of my investment learning has come from participating in online discussions.

I really enjoy Internet technology, so when blogging services started becoming freely available I decided I wanted to try it out. I’ve been hooked ever since.

10. What’s your best post?

I’m pretty proud of my research regarding the problem with the cashing out of shareholders of I actually spoke to the CEO of in order to get to the bottom of what was going on with BrownCo’s decision to only partially cash out shareholders.

11. What’s your worst post?

I really did not like the response I got to my post regarding my decision to purchase Merck. I guess this was a post that gave me quite a bit of grief. The comments and emails from traders started getting to me, but in the end I’ve prevailed and Merck is now performing nicely.

12. What financial publications do you read?

I read Barron’s, Morningstar, and lots of SEC filings.

13. What investing blogs do you read?

I read your blog (Gannon On Investing), Controlled GreedPink SheetsFootnotedCheap StocksBuffetteerMike Price’s Blog10Q DetectiveValue Discipline, and several other newer blogs.

14. What’s the best investment book you’ve read?

The Intelligent InvestorThe Warren Buffett Way, and You Can Be a Stock Market Genius are my favorite investment books. I guess I owe The Warren Buffett Way credit for opening me up to value investing. My real education however came from Warren Buffett’s shareholder letters.

15. What’s the last investment book you’ve read?

I’m just about finished reading The Little Book of Value Investing by Christopher Browne.

16. When did you start investing?

I started buying stocks when I was 15 or 16 years old but I really only started investing about 6 years ago.

17. How have you improved as an investor?

I have improved dramatically as an investor. I have really improved my understanding of intrinsic value and the importance of sustainable competitive advantages. I have also only recently really discovered special situation investing as a direct result of my blogging efforts.

18. How do you need to improve as an investor?

I need to improve on my focus and find more time to do research. I guess that is one of the pitfalls of blogging.

19. Where are the bargains in today’s market?

As you have probably noticed, I’ve been picking up some bargains in industries associated with housing. I recently purchased Realogy (H) and USG (USG). I think there could be some additional opportunities in this sector as the housing sector deflates.

With fuel prices coming down, I’m also interested in gas pipelines and coal distribution, but I’m not sure I’m ready to select any bargains yet. I think we need to look internationally for opportunities here.

This is a real tough question given the market’s recent run-up. I thought I was going to get lucky with opportunities in Thailand but I was too slow and prices are too high now given the risks.

20. What’s the most interesting company we haven’t heard of?

I’m not sure many people have heard of FactSet Research (FDS). I think they have an amazing moat with their unique historical market data. The only problem is that their stock price has not gone down low enough since I’ve been following them to provide me with a margin of safety.

I’m also looking at a company that caught my attention recently during a tender offer I participated in. Birner Dental Management Services (BDMS) is a network of dental practices in the Southwest. I haven’t finished my homework on this one, so I probably shouldn’t even be sharing this one. However, I really like the dental sector since they do not share as many insurance and regulatory problems as the medical sector. I have also been told several times that dentists are in short supply.

Finally, I bet some of your readers haven’t heard of Unilever (UL). However, I’m sure everyone is familiar with their food products. This European company has a great set of brands and was selling for a considerable discount. I’ve owned the stock for several years now and it has performed really well.

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