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Geoff Gannon April 29, 2018

The Second Side of Focus

To Focused Compounding members:
Back in 1991, Warren Buffett and Bill Gates were asked the same question. What one word described
how they became successful. Both men said “focus”. Most investors I talk to understand the importance
of focus. But, they understand it wrong. They think that Buffett and Gates mean they applied
themselves longer, harder, and in a more disciplined way to a particular task. This is the focus means
more school of thought. It’s half the story. There is a second side to focus.

Warren Buffett’s biographer, Alice Schroeder said this of Buffett: “…he expends a lot of energy checking
out details and ferreting out nuggets of information, way beyond the balance sheet. He would go back
and look at the company’s history in depth for decades. He used to pay people to attend shareholder
meetings and ask questions for him. He checked out the personal lives of people who ran companies he
invested in. He wanted to know about their financial status, their personal habits, what motivated them.
He behaves like an investigative journalist. All this stuff about flipping through Moody’s Manuals picking
stocks, it was a screen for him – but he didn’t stop there.” That’s the kind of focus investors imagine.
Hard work. But, there is another way to look at what Alice Schroeder said there. Focus means doing
more about less. But, focus also means doing less about more. Alice Schroeder did a Reddit interview
where she talked about Buffett’s approach to time management: “Warren is a master of time
management. He knows how to ease people off the phone without making them feel dismissed. He is
great at saying no…he manages his energy, reading when it’s optimal, talking on the phone when he’s
got the right energy for that and so forth… he does not multitask through his day.”

The question then is why others don’t do what Buffett has done. Why don’t they focus as much? Is it the
first side of focus: the hard work, the deep dive into one specific subject? Or is it the second side of
focus: denying yourself the possibility of knowing a lot of subjects superficially. This comes up whenever
I talk about specializing in some specific type of stocks. Recently, I gave this advice to two different
people. I said here is a list of categories of stocks that “work”. They tend to get overlooked. So, instead
of sifting through all the public companies out there – start by limiting yourself to stocks that are spinoffs
or have spun something off, that are OTC stocks, that are illiquid, that have just come out of
bankruptcy, etc. The reaction from both people was: “Eh. Why restrict myself? Maybe I’ll have a great
idea that doesn’t fit into any of these arbitrary boxes.” And they probably will. Odds are that the very
best investment opportunity out there right now isn’t in any of those arbitrary little boxes. But, you
don’t need the very best investment idea out …

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Geoff Gannon April 22, 2018

Patience as a Process

Friday, April 20th – Vestas Wind Systems by Kevin Wilde
To Focused Compounding members:
Andrew and I recorded four podcast episodes this past Friday. One of them was a Q&A podcast where the question was about patience: “Would love to hear your general thoughts about what I consider the greatest investment virtue of them all: patience. How do you think about it and how do you approach it practically? Can it be cultivated?” We didn’t give this question the time I think it deserved on the podcast. So, I’d like to give it a little extra time here in the Sunday morning memo.

Patience is a process. Warren Buffett has a quote he cites so frequently that some people think he’s the originator of the phrase: “The chains of habit are too light to be felt until they are too heavy to be broken.” Each day – as you are using your phone and your computer – you are re-wiring your brain. You are forming the habits of exactly how (and how often) you check your stock quotes and place your trades. You are forming reading habits. When online: do you read things word-for-word or do you skim? Do you decide what to read ahead of time, or do you let reading material come to you throughout the day? None of these things are sins. But they are all habits that must be unlearned if you ever – even just once – want to force yourself to do the exact opposite. If you spend every day of your online life skimming paragraphs, it will take you extra effort to read a 10-K word for word compared to someone whose brain has been wired – through daily training – to read every word of every paragraph he encounters. He won’t feel an urge to skim. You will. It takes a lot of willpower to regularly resist an urge. So, don’t. Don’t resist urges. Instead use what precious little willpower you have to shift your habits from unhelpful ones to helpful ones.

A habit is just a process you practice every day. To change your habits, change your process. Stop using an online broker. Stop placing your own trades. I call an actual human being on the phone and place all my trades that way. This one change will cause a dramatic drop-off in your turnover rate. Trading today is so cheap and easy that it seems costless. The cost is patience. In an earlier era, there were big costs and big inconveniences in trading stocks. A desire to avoid those visible costs inadvertently caused investors to avoid the invisible cost: a habitual erosion of their patience. Every trade you place makes you more likely to place another trade in the future. Cultivating patience is about cultivating inaction. It’s about building up intellectual inertia. An impatient investor acts quickly based on a small amount of analysis that supports a barely decisive conclusion. A patient investor acts slowly based on a large amount …

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Kevin Wilde April 20, 2018

Vestas Wind Systems A/S (OCSE:VWS)

Opportunity Summary:

  • Vestas holds the top position among wind turbine manufacturers.
  • The industry has attractive economics (high ROIC) and long-term growth prospects; wind as an energy source has crossed the threshold of being able to compete with fossil fuels without the aid of subsidies.
  • Vestas (>16% market share in cumulative capacity & new builds), Siemens Gamesa (~15% market share), and GE (~12% market share) are the dominant players. 
  • Due to scale advantages and cost cutting initiatives started in 2011, Vestas has the best EBIT margin (>10-% vs. 5-8% for GE & Siemens and <5% for most other competitors).
  • Vestas’ stock is down 50% in the past few months based on concerns on how well wind energy can fair against other energy sources without government subsidies and competitive industry pricing that was predicated on the industry’s move to an auction system.  My research suggests these risks are overblown considering the already cost competitive nature of wind and Vestas’ competitive position / profitability.
  • Management has done a great job of running the company over the last few years, having reduced fixed and variable costs by streamlining the business and by growing the highly profitable / fast growing / sticky services business.
  • My first pass at a valuation suggests that the stock could do well as a long-term holding. 

NOTE: I first became aware of the opportunity via VIC.  See link for detailed write-up:

I would love to hear your thoughts if you have some industry insight or have looked at the opportunity.  Send me a reply here in the thread, or directly at 




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Geoff Gannon April 15, 2018

Fear, Greed, and Boredom

Sunday, April 15th – Computer Services, Inc. (CSVI) by Jayden Preston
Sunday, April 15th – AutoNation (AN) by Dave Rottman
To Focused Compounding members:
In a recent interview, I said: “Stocks bounce around due to fear, greed, and boredom. You can make a lot of money being greedy when others are fearful. But, you can make at least as much money being bored when others refuse to be bored. There are a lot of boring stocks in the OTC market. They’re not cheap because people are afraid of them. They’re cheap because the people who own them are tired of them always being cheap…In listed stocks, you get bargains when people are scared. In OTC stocks, you get bargains when people are bored.” There are, of course, even some listed stocks that investors get bored with. Andrew and I just did a podcast about one such stock: Tandy Leather Factory (TLF). Tandy is a microcap. But, it’s not so illiquid as to be “uninvestable” for most individuals. An individual who decides not to invest in Tandy can’t really make the argument that illiquidity is the culprit. So, what is? For most people, I think it’s boredom. Some stocks just bore people even when they’re good businesses selling at a good price. Tandy is one example. It dominates leathercrafting retail in the U.S. It has a professional investment manager as its Chairman (Jeff Gramm’s Bandera Partners owns 31% of the stock) and it has a deal with a bank to borrow quite a bit of money to buy back quite a bit of its stock should the board decide to do so. So, Tandy checks the Warren Buffett boxes of wide moat and rational capital allocation. And yet it trades at maybe 1.2 times book value, maybe 1.5 times net current assets, and maybe 5 to 6 times EBITDA. Those levels aren’t quite cheap enough to attract deep value investors. But, the company’s competitive position is far stronger than any stock a deep value investor would get the chance to buy. Breeze-Eastern (this is the helicopter rescue hoist maker Andrew and I did a “post-mortem” episode about) falls into this same “boring” hidden champion group. No one I mentioned the idea to ever thought it was a bad stock to buy. But, I also never heard anyone say it was their favorite idea. It was a solid idea they weren’t in any great hurry to go out and buy. It was boring. Boring stocks do remarkably well. The best screens I can create for small, illiquid, consistently profitable stocks always have the same pattern in their back tests: as the screen’s alpha rises, its beta falls. You’ll find that a good, solid screen – like a low price relative to net current assets and a long history of profitability (in other words, something that picks stocks like Tandy) – will tend to have both less volatility and higher returns than a screen that focuses on even cheaper, even more exciting (that …

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Geoff Gannon April 15, 2018

AutoNation (AN)

I’m creating this thread to start discussion of AutoNation (AN). The stock was written up by Dave Rottman here:

It’s a nearly 6,000 word article. So, I wanted to focus in on one specific point (mentioned in the title). AutoNation is a “cannibal” as Charlie Munger would say. It eats its own shares up. I thought a table might help.

Shares Outstanding

1998: 471 million

2003: 287 million

2008: 178 million

2013: 123 million

Today: 92 million

Anyway, this is the place to ask Dave questions about AutoNation, to discuss the stock amongst yourselves, etc. Please do so below.…

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Geoff Gannon April 15, 2018

Computer Services Inc., “CSI” (CSVI)

This is the core processor stock that was just written up by Jayden Preston:

I also spent the better part of today’s Sunday Morning Memo on CSVI. You can find that memo entitled “Fear, Greed, and Boredom” here:

Since CSVI doesn’t file with the SEC, it’s not on EDGAR. For that reason, I thought I should include links to the specific pages where you can find “EDGAR-like” information on the company.

The company’s “Disclosures” page over at has annual reports going as far back as 2006 (filed in 2007, covering the year 2006):

CSI always includes a “Selected Financial Data” table in the annual report that goes back a full 10 years. So, the 2006 annual report has data going back to 1996. 

The company also has an investor relations page that includes financial data in other summary forms:

I don’t know if I’ve mentioned this before, but I always read a company’s Glassdoor page as well. This is a site that includes employee reviews. CSI has a lot of reviews on its Glassdoor page. So, you might want to check it out in this case. I usually read the reviews more to get a sense of what the company actually does day-to-day, what incentives are like for lower-level employees especially those that deal with customers, etc. than because I prefer companies with higher reviews from employees or something like that. 

I’ll summarize the reviews in general here by saying this company doesn’t have very high base pay, it does have benefits, it doesn’t have very high employee churn, and management cares about hitting profit targets (and probably the stock price). Employees also mentioned something that had been disclosed in a press release:

“..non-executive full-time employees with the company more than 12 months will receive a one-time $1,300 cash bonus in March. Part-time and other employees with the company less than 12 months will receive a one-time cash bonus of $650 also in March. The company also stated that all eligible employees will receive an additional one-time contribution to their retirement plan.”

This is due to the tax savings that Jayden mentioned in his article. 

Anyway, this is the thread to use to ask me questions about CSI, to ask Jayden questions about CSI, to give your thoughts, etc. Please do so below.…

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Geoff Gannon April 15, 2018

AutoNation (AN): A Cheap Cannibal with Minimal Downside

Member write-up by Dave Rottman


Introduction and Overview

AutoNation (AN) is the largest automotive retailer of new and used vehicles in the United States. As of the end of 2017, they owned and operated 360 new vehicle franchises with 33 different new vehicle brands through 253 dealership locations concentrated in major metropolitan areas primarily in the southern Sunbelt region. AutoNation also owned and operated 76 collision centers scattered throughout the continental US.

Prior to 1999, AutoNation was named Republic Industries and was involved in waste management and then later electronic security services, vehicle rentals, and automotive retailing. Since the turn of the century, AutoNation has been focused exclusively on the automotive retail business.

Despite changing conditions in the coming years with the advent of online automotive retailers, autonomous vehicles, increased ride sharing, and electric vehicles, AutoNation offers investors several attractive characteristics.

First, as the largest automotive retailer in the United States, AutoNation enjoys benefits of scale both in terms of lower general and administrative overhead and in volume discounts when purchasing parts for the repair business and even inventory from manufacturers. As the automotive retail industry continues to undergo consolidation into a less fragmented market, these benefits are likely to amplify and strengthen the competition position of those players with scale, like AutoNation.

Next, the business generates a large and noncyclical stream of cash flow related to its parts and service business that has increasingly become a larger portion of earnings. While new and used car sales and the associated finance and insurance revenues are cyclical, parts and service earnings have provided a stable base of cash flow. In addition to stabilizing the cash flow of the overall business, this has also allowed AutoNation to consistently funnel cash into stock buybacks when shares prices are attractive, leading to a 5, 10, and 15 year growth rates of approximately 10% in earnings per share. This is impressive considering that the sales volume of actual new and used vehicles has essentially been flat over the course of the cycle.

Further, AutoNation holds a large amount of attractive real estate that provides a meaningful asset-based value that can be sold as a next-best use that supports valuations if earnings power were to become impaired or if/when AutoNation decides to decrease its physical presence.

Finally, and more speculatively, in late 2017 AutoNation announced a partnership with Waymo – Google’s autonomous vehicle company – where AutoNation will maintain and repair Waymo’s autonomous fleets. While the actual value this will provide to AutoNation is extremely uncertain at this point, it does serve as an offsetting factor to the risks posed by increased use of autonomous vehicles and ride sharing by hitching AutoNation up to the dominant player in autonomous vehicles in the nascent stages of this development.


The Business

There are four parts to AutoNation’s business: new vehicle sales, used vehicle sales, parts and service (P&S), and finance and insurance (F&I).

New and used vehicle sales are straightforward: generally speaking AutoNation purchases new vehicles from …

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Geoff Gannon April 15, 2018

Computer Services Inc. (CSVI): An Unlisted, But Super Predictable Company Trading at an Unleveraged P/E of 15 times Next Year’s Earnings

Member write-up by Jayden Preston




Computer Services Inc (often called “CSI”, the ticker is CSVI) is an unlisted stock in the US. It does not file with the SEC. But it does trade over the counter. The Company also publishes annual reports and quarterly earnings reports. You can find more information about the Company on


As you would expect from an unlisted company, their annual report is not as extensive as you would find in a 10K. However, there are financial figures of the Company going back to 1996. There are also three main comparable companies that are listed. So, you can gather enough information to make an educated judgement on the Company.


CSI provides service and information technology solutions to meet the business needs of financial institutions and corporate entities. Their main clients include community banks, regional banks, multi-bank holding companies and a variety of other enterprises. They emphasize that their services are tailor-made to the clients’ needs.


The Company categories their revenue sources into two major parts: 1) core processing and 2) integrated banking solutions. Below I quote from the annual report on the range of services they offer:


“We derive our revenues from processing services, maintenance, and support fees; software licensing and installation fees; professional services; and equipment and supply sales. In addition to core processing, our integrated banking solutions include digital banking; check imaging; cash management; branch and merchant capture; print and mail, and electronic document delivery services; corporate intranets; secure web hosting; e-messaging; teller and platform services; ATM and debit card services and support; payments solutions; risk assessment; network management; cloud-based managed services; and compliance software and services for regulatory compliance, homeland security, anti-money laundering, and fraud prevention.”


As you can see, their solutions cover a very wide range of operational needs of financial institutions. They are almost like an outsourced IT department for financial institutions, with many functions they provide being highly critical.


Within the bank core processing industry, CSI is a distant fourth player, with a market share of 6.6% in 2017. The biggest player is Fiserv, with 37.1% of the market. The next two players are Jack Henry and FIS, with market share at 17.6% and 16.6% respectively.





For the business of core processing and other bank IT services to be durable, two key conditions are needed: 1) Financial institutions, such as banks and credit unions, remain durable and 2) Outsourced solutions continue to be an option.


Historically, banks are some of the most durable businesses. Now, with cryptocurrencies being all the rage, there are people who will question whether banks will remain durable. That is too big a topic to discuss in full here. But in short, my personal thought is it is too speculative to believe bitcoins will take over the whole banking industry. A more reasonable scenario to me is the blockchain technology will be incorporated within the current banking system instead.


As …

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Philip Hutchinson April 13, 2018

Facebook – making implicit assumptions explicit

Obviously, Facebook has been in the news a lot recently. And Geoff has written a couple of articles that touch on the company directly and indirectly. Also, I’ve been reading up on the company recently and thought it would be interesting to post about whether Facebook could be a value investment.


This is basically just addressing directly some of the implicit assumptions that get made when you look at a fast growth stock like Facebook. I’m not going to go into Facebook as a business in detail. This is more about testing how realistic assumptions about Facebook’s growth really are. Now that said – I do have a view on Facebook’s business quality. In short – it’s extreme. This is a company that can convert 35 – 40% of sales into free cash flow while growing at very very fast rates. But I’m not going to break that down or look at the sustainability of the business in this post.


First, I am going to start with the premise that, economically, Facebook is a media network wholly dependent on advertising revenue. Right now, that’s true. There is a tiny amount of non advertising revenue, but it is immaterial. Of course, this may not always be true. It could find other sources of revenue. But that is completely speculative.


So we can say, one, the addressable market for Facebook is global ad spending. And two, we can assume that ad spending will grow over time with nominal GDP.


The most recent figures I can find estimate global ad spending for 2018 to be $558 billion. Obviously, you can find other estimates, but they’re not going to be hugely different, so we can work with that figure.


Let’s assume that grows at 4% per year for the next 10 years (roughly, nominal GDP – maybe this is a bit on the conservative side). 2028 ad spending would be $826 billion.


Now let’s look at Facebook. 2017 sales were $40.7 billion. Then let’s assume Facebook can grow sales at 15% per year for the next 10 years. This gives 2028 sales of $164 billion.


If Facebook grows like that, it will get further scale benefits so I am comfortable assuming a 40% free cash flow margin. That gives free cash flow of $65.9 billion.


Shares outstanding could be 3,603 million in 2028 (assuming dilution of 2% a year). So, that gives free cash flow per share of $18.29.


If you assume a 15x FCF multiple for “mature Facebook”, that gives a 2028 value of $274/share. So, roughly 65% higher over 10 years. Now, some of that is quite conservative. For example, it gives no credit for the huge cash buildup that would take place over this period (though that raises questions of capital allocation which are not easy to answer in Facebook’s case). It quite probably understates what Facebook’s margins could look like. And a 15x multiple is pretty cheap for a business of Facebook’s quality, even if it’s just a nominal

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Andre Kostolany April 5, 2018

National Cinemedia (NCMI)

Would very much appreciate everyone’s thoughts / comments / feedback / criticism. If there’s interest, I might follow-up with a full writeup.


  • NCMI has the #1 market share for on-screen advertising (about 50%)
  • The industry is an oligopoly with NCMI and Screenvision having about 85% market share
  • Basically NCMI owns the right to run a 30-minute pre-movie show in its founding members US theaters, which includes advertising. This right is backed by long-term exhibitor agreements with the founding members which, to the best of my understanding cannot be revoked
  • Let me repeat, 90% of the opportunity around NCMI revolves around their ability to monetize the 30-minutes BEFORE the movie trailers start
  • Founding members (and co-owners of NCMI) are AMC, Cinemark, Regal
  • NCMI derives revenue principally from selling advertising during these 30 minutes
  • NCMI has produced stable OIBDA margins since its IPO as well as relatively stable revenues
  • NCMI, Inc., the publicly listed entity owns a 49.5% stake in NCMI, LLC. The rest of LLC is owned by the founding members
  • AMC, the largest owner of NCMI, LLC is being required to divest the majority of its equity interests after an anti-competitive DOJ ruling (this was a condition for its takeover of Cinemark)
  • AMC has until June 2019 to dispose of 9.5% of its stake (to reduce its stake below 5%)
  • At the same time, 2017 had a relatively mediocre movie slate and attendance was down. Somehow this led to the stock falling from $16 to $5
  • At its current price of $5.24 NCMI trades at a 13% dividend yield
  • The company pays out almost the entirety of its free cash flow via dividend to shareholders and founding members
  • 2018, so far, has been a better year in terms of theater attendance led by Black Panther
  • Optimism and pessimism about the slate come and go, offset by probably 6 to 12 months
  • MoviePass could help increase theater attendance as well

Further Comments

  • I find this situation highly interesting and am looking for reasons why this traded at a 5-6% dividend yield forever and now should trade at 13% yield. Note I am using dividend yield as a simplified proxy for FCF, which is somewhere in the range of $120MM-$150MM per annum (to LLC, not Inc, so cut this in half)


  • Further decline in theater attendance
  • Weakening in pricing power if the US moves due to impact of reserved seating/online ticketing. Advertisers may be worried that nobody will watch the pre-shows (which start 30 minutes before the advertised movie start time) if this happens
  • AMC somehow finds a way to wiggle out of its contract with NCMI as once it only owns <5% of NCMI, LLC interests are less aligned
  • The threat of cinemas losing their exclusive right to screen movies a couple of months before DVD/other releases
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