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Geoff Gannon October 12, 2010

Getting Started: What Should a New College Graduate Do to Get a Career in Investing? – 2 Tips

A reader sent me this email:

I graduated college this past May and I am working in finance in Manhattan…What type of work experience would you recommend for a recent graduate other than reading SEC filings and managing their own portfolio?

#1 Write a blog.

Each of the 5 investing bloggers I interviewed said blogging makes them a better investor. Write about the stocks you’re studying. Tell people what you find in the SEC reports. And tell them what you think it means.

If you give out your email address – like I do – you’ll get emails. Trust me. You’ll hear from professionals, amateurs, students and everyone in between. And if you blog about a stock they own: they’ll tell you what you got right and what you got wrong.

I don’t allow comments on this blog. That’s not because I’m trying to limit speech. It‘s because I‘m trying to increase the number of emails people send me.

When the subject is stocks: most people are more comfortable emailing you. Most the bloggers I interviewed had the same experience I did. You’d get comments. But the best comments came from emails. Some of this is legal. Most of it is cultural. People like to talk stocks in private.

#2 Write Research Reports

When Benjamin Graham came to Wall Street he was a 20 year old college grad. He’d been offered 3 teaching positions at Columbia: Math, English, and Philosophy. He was clearly suited for an analyst job. Guess what? The firm that hired Graham made him a bond salesman.

So how did Graham get an analyst job?

He wrote a research report about the Missouri Pacific Railroad. No one paid him to do it. He just did it. A friend of his shared it with another firm – not the one Graham worked for – and they liked it. But they weren’t interested in shorting the Missouri Pacific. It wasn’t the idea they liked. It was the author. They offered Graham a job as an analyst.

Graham’s bosses realized they had to make Graham an analyst if they wanted to keep him.

And I didn’t tell you the most important part of the story. The firm Graham worked for didn’t have a statistical department before Graham. They didn’t have analysts. They created a new job for him. Because they saw he was good and wanted to keep him.

The job you have now probably doesn’t let you do the work you want to do. It probably doesn’t let you show people what you’r best at. So use your free time to do the work you want to do. If you’re good at it: someone will pay you for it one day.

It’s hard for people to see you’re good at something if the job you’re in doesn’t let you show those skills.

Make report writing a hobby. It will make you a better analyst. It will make you a better writer. And it will give you something to …

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Geoff Gannon October 11, 2010

Investing Ideas: Where Does Geoff Get His Investing Ideas? – Screens, Blogs, and 4 Examples

A reader sent me this email:

“So, where do you get your investing ideas?”

I can’t answer that.

Some fiction writer – I’m going to say it was Stephen King in On Writing but I’m probably wrong – said writers can’t tell you where they gets their ideas. All they can really do is tell you where they got this one idea.

It’s the same with investing ideas. I can tell you where I got a specific idea. I can’t tell you where I get my ideas generally. Because I don’t know.


Idea #1

I got the idea for Bancinsurance (BCIS) from a screen.

Back in 2006: I screened for insurers trading below book value. I threw out most insurers that passed the screen. I wanted an insurer with a long history of low combined ratios.

Bancinsurance had a low combined ratio – that means a high profit margin – in most years. And it had a niche.

This was during Bancinsurance’s bail bond reinsurance problem. So I just followed the stock. I didn’t buy. I kept Bancinsurance in mind. It got real cheap during the 2008 crash. But I was busy looking at other stocks. Then: the bargain stock herd was thinned by the 2009 rally. So my options were limited. My opportunity cost was low.

The SEC dropped their investigation. And I bought Bancinsurance stock.

The original screen was simple:

Industry = Property/Casualty Insurance

Price-to-Book < 1


Idea #2

Where did I find Solitron Devices (SODI)? Easy. I got it from Greenbackd. There was a guest post on Greenbackd. It was good. So I looked into the stock.


Idea #3

I got the idea for George Risk Industries (RSKIA) from another blog post. This one was by Ravi at Rational Walk. It sounded interesting. The stock was stupid cheap. So I expected to find George Risk’s actual business was worthless. I looked at the 10-Q and the past 10-Ks. I saw the business was worth a lot. The stock price was 95% covered by George Risk’s stocks, bonds, and cash. If you bought the stock: you got the business for free. So I bought the stock.


Idea #4

I got the idea for Birner Dental Management Services (BDMS) from a screen. Actually: 2 screens.

I always screen for stocks that buy back enough stock to lower their share count year after year. And I screen for stocks that have free cash flow year after year. One day: I combined the two criteria. Birner passed the screen.

So where do I get my investing ideas?

I got 2 of the 4 ideas I talked about in an earlier post from blogs. I got the other 2 from screens.

I don’t know if that’s a good sample.

I’ve checked the last 10-Q and 10-K for thousands of stocks. I’ve glanced at their 10-year histories. If that’s an investing idea: I’ve had thousands of them.

But that’s not an idea. An idea …

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Geoff Gannon October 10, 2010

Going Private Transactions: Should You Buy a Stock To Make 4% in 3 Months? – Bancinsurance

A reader sent me this email:

Hi Geoff,

I read about your investing experience with BCIS. Congratulations with the success. I am considering buying Bancinsurance (BCIS) at $8.14 in order to make $8.50 when the deal closes for a 4% gain in a few months. Not a very high return but it looks like the deal is going through. Could you give me your opinion on the deal?


I think the deal will happen.

The annualized return is good if you buy at $8.14. We’re talking about 21% annualized. The non-annualized return is low: about 4.4%.

I don’t buy anything where the non-annualized return is less than 10%. Because:

a) There is always a small chance the deal won’t happen and

b) There is always a big chance the deal will take longer than you expect.

In this case: the buyer is the CEO and the buyout price is low.

The low price – 89% of book value – makes the CEO want to get the deal done. Also: Bancinsurance will save money by stopping its reports to the Securities and Exchange Commission (SEC). On the other hand: Bancinsurance is a controlled company.

If the CEO runs into trouble with financing – or something like that – he won’t worry about taking a long time or bailing. There’s no one competing with him. Bancinsurance’s CEO doesn’t want to sell the company. And he owns most of the stock. That means it’s his bid or no bid.

The big risk is a delay. That happens a lot.

In this kind of investing: all the surprises are bad surprises. I don’t expect a higher offer. That’s why I sold. I had other opportunities. I didn’t want to wait for the last 4%.

I’m all about the first 30% to 50%. I don’t wait around for the last 10%.

But – yes – I expect the deal will happen. Most likely: you will make a 4% profit in 3 months or less.

However: a delay is always possible.

When a board says 3 months: I calculate the annualized return as if they said 6 months. When they say 6 months: I act like they said a year.

And I pass on deals where the non-annualized return is less than 10%. Sometimes a 3 month deal closes in 1 year. I have better places to be.

In terms of pure odds: Yes. The deal will probably get done at $8.50 a share in cash by January 1st, 2011.

Talk to Geoff about Going Private Transactions

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Geoff Gannon October 9, 2010

Net Current Asset Value Bargains: How Do You Screen For Them? – Retained Earnings

A reader sent me this email:

I’m…curious how you start your searches for new ideas and what methods you use. Is there a starting parameter you choose to look at first, like 52wk. low or stocks trading below 50% of book value, etc.?


But I do keep lists.

I keep a list of stocks trading below net current asset value.

Net Current Asset Value = Current Assets – Total Liabilities

When you buy a stock where the net current asset value is more than the stock price: you get the customer relationships, brands, and factories for free.

Benjamin Graham bought stocks at 2/3 of net current asset value and sold them when the stock price hit its net current asset value. If the net current asset value didn’t change: Benjamin Graham made 50% on his investment.

Most net current asset value screens are bad. You need human eyes. Two good blogs that cover net current asset value bargains are: Greenbackd and Cheap Stocks.

I only keep track of stocks priced less than net current asset value if they:

a) Have more past profits than past losses or

b) Are planning to liquidate

The quickest way to check if a stock has more past profits than past losses is to look at retained earnings. Retained earnings are on the balance sheet. If retained earnings are positive: the business has more past profits than past losses. If retained earnings are negative: the business has more past losses than past profits.

This retained earnings trick can backfire. Spin-offs screw it up. It’s not perfect. But it’s quick. In seconds: retained earnings show you the net current asset value bargains worth studying.

Talk to Geoff About Net Current Asset Value Bargains

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Geoff Gannon October 8, 2010

Investing Blogs: 17 Blogs Geoff Reads – And Paul Krugman

A reader sent me this email:

“Which blogs do you usually look at?”

I use Netvibes to keep track of 45 blogs. When any of those 45 blogs posts something new, I read it.

Lately: I’ve been using Twitter too.

I read mostly investing blogs. I prefer stuff where the writer is covering stocks I don’t know. Small is good. Foreign is better. I like stock specific analysis. I have no interest in stuff about the market.

There is one exception: I read Paul Krugman. Krugman doesn’t make me a better investor – worse probably – I just like his writing.

I’ve interviewed the authors of 5 blogsGreenbackdStreet CapitalistSINLetterCheap Stocks, and Fat Pitch Financials.

I love: The Interactive Investor Blog and Variant Perceptions.

You should also read: ShadowStockAbove Average Odds Investing, and Petty Cash.

Two blogs that are a little different – but definitely worth reading – are: Market Folly and The Official Activist Investing Blog.

One blog I’ve really been getting into lately is: Can Turtles Fly?.

A lot of these names aren’t surprises. I’ve linked to them before.

I don’t know what my favorite blogs are. Don’t ask. Some blogs give me great info but don’t have a voice. I forget to list those. And some bloggers I like don’t write much. Their names may be missing too.

Here are 3 more: Rational WalkRagnar is a Pirate, and Greg Speicher.

I could go on forever. I won’t.

One more: Canadian Value Investing.


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Geoff Gannon October 7, 2010

Corporate Governance: Do Microcap Stocks Do Wrong by Shareholders? – Small vs. Young

Sivaram – of Can Turtles Fly? – asked a great question about my post on microcap stocks:

How about poor corporate governance? Based on your experience, would you say it’s hard to price the risk of poor corporate governance?


It’s very hard to price the risk of poor corporate governance. But in my experience: people generalize way too much about big caps having good corporate governance and microcaps having bad corporate governance. Big caps get more attention from outsiders. But big caps can still have bad corporate governance. The issue is that fewer people are paying attention and looking out for you in microcaps. You aren’t going to have analysts, reporters, fund managers, and activists – until things get real ugly – looking out for you and saying bad things about management in microcaps. You will have that in big caps that do wrong by investors.

One huge warning: There are microcap frauds.

I would say – and this is just my own experience talking – microcap frauds tend to be in more speculative and young companies rather than purely small companies. A lot of small companies are also young so people get the two confused. Old microcaps are often like old big caps and young microcaps are often like young big caps.

Another thing to look for in terms of fraud is a company that wants to stay public regardless of the business it’s in. Some microcaps will change their business completely more than once without ever going private. Does that worry me? Sure. There may be exceptions. But if a company wants to stay public more than it wants to stay in the same line of business that’s a huge warning sign that something is very wrong with management.

At the other extreme: a microcap that is an old, family controlled company with tons of retained earnings in some mundane business is often just that. If it’s hoarding cash, it’s usually doing it for the same reasons a big cap company hoards cash. Management has few options in the existing business and doesn’t know much about putting money to work elsewhere. They aren’t doing right by shareholders. Paying the cash out would be better. But they probably aren’t criminals either. They’re probably just humans running a no-growth business that throws off more cash than they can use.

I would read the SEC reports carefully. Some people come to different conclusions. So for me all the George Risk (RSKIA) related party transactions – and there are a ton of them – aren’t nefarious, because if you look at the actual dollar amounts they aren’t generous. The family doesn’t pay themselves as much as it could get away with, it doesn’t pay the board at all, and the other transactions aren’t egregious.

Then look at a bigger stock I’m in: Barnes & Noble (BKS). The Riggio related party transactions are egregious. Len’s brother, Stephen, stayed on as Vice Chairman after they got a new CEO to replace …

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Geoff Gannon October 6, 2010

Infrastructure Spending: High Speed Rail, High Speed Internet – And Paul Krugman

Paul Krugman blogs about Republicans railing against rail. He links to an article by Jonathan Cohn who says:

The Recovery Act, of course, has a lot of transportation funding in it–with a particular emphasis on high-speed rail, the area in which the U.S. may be most conspicuously behind other countries. It’s one of those investments that virtually every reasonable expert, from left to right, would agree is worthwhile. But reasonable people appear to be in short supply in the Republican Party these days. 

I’m not an expert. And I’m not reasonable. Because I think building high-speed rail in the U.S. ranks somewhere behind digging ditches and filling them in.

I have no problem with infrastructure spending. Should we build nuclear power plants, solar panels, broadband networks, and a million other things? Sure. But I’m with Charlie Munger on this one. High speed rail is basically spending billions of dollars today to give some folks subsidized taxi rides tomorrow.

Trains moving stuff is a great idea. Planes moving people is a great idea. Trains moving people is a dumb idea.

Krugman is honest about why he likes high-speed rail:

I suppose there’s some echo of this attitude on the other side; people like me probably have a slight affinity for rail because it’s a kind of socially provided good. But I don’t think it’s comparably irrational: rail just makes a lot of sense for densely populated regions, especially but not only the Northeast Corridor. 

High-speed rail is a kind of socially provided good society doesn’t want. They want planes. And they want cars. And the private sector gives them both – often bankrupting itself in the process.

And – no – high speed rail doesn’t make sense for densely populated regions. It makes sense for cities. Like Krugman: I live in New Jersey. I take trains. You know where I never go? New York.

In New Jersey: most people don’t go to New York. They go from town to town. Is that the kind of high-speed rail we want? We’re going to crisscrosss a state more densely populated than Japan with railroads so I can get to Summit or Madison in 5 minutes?

Railroads don’t work in densely populated regions. They work in cities. And New Jersey isn’t a city. What Krugman wants is fast travel to New York, Boston, D.C, and Chicago. We have that. It’s called a plane.

At the end of his post, Krugman touches on a useful socially provided good:

…rail makes even more sense in the digital age. I almost always take trains both to New York and to Washington, and consider the time spent on those trains part of my productive hours — with notebooks and 3G, an Amtrak quiet car is basically a moving office. And I don’t think I’m alone in that.

No. I’m right there with you. But is Krugman using rail infrastructure? Or is he using internet infrastructure?

If Krugman wants to spend money bringing fast trains to

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Geoff Gannon October 6, 2010

Case Study: Geoff’s Investment in Bancinsurance – Both His Letters to the Board of Directors

In an earlier post about Bancinsurance (BCIS), I answered a reader’s email that asked:

I came across your Barnes and Noble write up on GuruFocus. I noticed in the comments section you mentioned two letters you sent to the board of directors of an insurance company you owned. Would I be able to get those off of you? 

I only included my first letter to the board in that post. This post – at the bottom – includes both my letters to the board of directors.

I’m not showing you these letters because they influenced the board. They didn’t. The CEO first offered $6 a share. The board finally agreed to $8.50. I had nothing to do with that.

I’m showing you these letters, because readers ask about my own investments. What kind of stocks do I pick? And how do I value them? These 2 letters give you an idea.

Obviously: they were written for a specific audience.

So – yes – I went out of my way to use conservative estimates of Bancinsurance’s value in these letters. I asked the board to reject any offer less than book value. Does that mean I thought Bancinsurance was worth book value?

Hell no.

I thought Bancinsurance was worth more than book value. Still do. And – in private – I would’ve told you that. I talked about book value in the letters, because I was asking for something. I wasn’t being rational. I was being reasonable.

I only owned 0.5% of Bancinsurance. As I said in an earlier post: I would’ve liked to own a lot more. I didn’t have the time and volume I needed to get the shares I wanted. That’s life.

I wasn’t a big shareholder. The board didn’t care what I wrote.

They eventually settled on an arbitrary number: $8.50. Book value had risen to $9.50. There’s no logical reason for the $8.50 a share number. They outline reasons in the going private transaction report. None of them are logical.

If you want to learn about the $8.50 a share Bancinsurance deal and how it values the company, read my 2 letters to the board, Raymond James’s presentation, and the going private report to the SEC.

Here are my letters to the Bancinsurance board of directors. The first letter was sent in April and argues against the CEO’s original $6 a share offer. The second letter was sent in July and argues against the CEO’s raised $7.25 a share offer. The board later agreed to the CEO’s re-raised $8.50 offer.

Geoff Gannon’s 1st Letter to Bancinsurance’s Board of DirectorsGeoffs 2nd Letter to Bancinsurance’s Board of Directors

Talk to Geoff about Bancinsurance (BCIS)

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Geoff Gannon October 6, 2010

Small Stocks: Should Value Investors Only Buy Microcap Stocks? – 4 Stocks People Ignore

Greg Speicher has posted twice now on a great discussion over at the Corner of Berkshire and Fairfax message board.

Question: Should value investors stick to small cap stocks when investing their own money?

My Answer: Every value investor should try small cap stocks. Most don’t.

I get a lot of emails saying something like this:

I’m getting out of college this year and I just recently got interested in value investing by reading Warren Buffett and Benjamin Graham – what should I do?

I give a lot of responses like this:

You should focus on the smallest stocks out there. Nobody else is. You’ll have to do real work every day. You’ll only be able to work with primary sources: the 10-Ks and 10-Qs. You’ll learn more working with small cap stocks. And you’ll have to decide for yourself. Benjamin Graham’s Mr. Market metaphor is obvious in tiny stocks. In big stocks: even value investors get lazy and listen to the market instead of taking advantage of it.

Microcaps are the best place to learn investing. But are they the only place to make money?


You can make money buying stocks people hate or you can make money buying stocks people ignore.

Here are 4 microcap stocks people ignore – and the reason why:

  1. Bancinsurance (BCIS): Unusual Combined Ratio
  2. Solitron Devices (SODI): Past Bankruptcy; Can’t Pay Dividend
  3. Birner Dental (BDMS): Cash Earnings Not Reported as Income
  4. George Risk (RSKIA): Combines Investments With a Business

Here’s where I agree with some folks who say microcap investing is harder today than it was when Buffett started. It is harder. There are mechanical screens. Most of the good bargains you find depend on something you can’t screen for.

A microcap bargain is often the result of an accounting quirk or a one of a kind business.

If Bancinsurance had a combined ratio of 100, it might’ve been worth 2/3 of book value. Lots of insurers write at a combined ratio of 100. And lots of insurers trade below book. But Bancinsurance had a very long history – 29 years – of writing at very low combined ratios. If Bancinsurance was a big cap stock, everyone would know that. Nobody thinks Progressive (PGR) is worth book value. Everybody knows a dollar of Torchmark (TMK) book value is worth at least as much as a dollar of MetLife (MET) book value, because everybody knows MetLife – blimps and all – can’t write at a lower combined ratio than Torchmark.

Since Bancinsurance was a microcap – delisted in fact – it’s incredible underwriting history was ignored. Even after the CEO offered $6 a share, I could get some shares at $6 and under. Try doing that in Torchmark or Progressive. In years that don’t end in ’29 and ’08 – it just doesn’t happen.

Let’s look at the 4 examples of microcap bargains I threw out off the top of my head. There’s a madness to the market’s method in each case. Basically: …

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Geoff Gannon October 4, 2010

Investing Ideas: 26 Things Geoff Looks for in a Stock

A reader sent me this email:

Hey Geoff

Just curious, where do you get your investing ideas?

Blogs are the best source. Screens are good too. Certain things catch my eye.

Here’s what I look for in a stock:

  1. Market capitalization under $100 million
  2. Low float
  3. Foreign – especially from a small country
  4. Not listed in home country
  5. Controlling shareholder (maybe owns 30% – 70%) runs company
  6. Long history of free cash flow
  7. Share buybacks that reduce the share count – especially if done every year
  8. A Dutch auction to buy back a lot of stock at once
  9. Delisted
  10. Just spun-off
  11. Huge, one-time problem (think American Express Salad Oil scandal)
  12. Bankruptcy in past caused by legal trouble
  13. Hostile takeover attempt by someone who owns good chunk of company’s shares
  14. Mismatch between reported earnings and free cash flow – FCF is much higher
  15. Accounting quirk – amortization, carrying at cost, owns part of another public company
  16. Selling for less than cash and investments
  17. Selling for less than net current asset value
  18. No analyst coverage
  19. Niche business
  20. Lack of price competition – or the price leader
  21. One of a kind business
  22. Wrong time in cycle to buy this kind of stock: advertising, credit, homes, autos
  23. Goodwill write-downs and restructurings cause reported losses when making money
  24. “Too much uncertainty”
  25. Nowhere near a 52-week high
  26. Stock once traded at several times today’s price

Talk to Geoff about Where He Gets His Investing Ideas

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