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Geoff Gannon July 26, 2018

Kaanapali Land (KANP): A Super Illiquid Speculation on Hawaiian Land

Member write-up by DAVE ROTTMAN



Kaanapali Land LLC (KANP) is a business that owns land on Maui, one of the major Hawaiian Islands. Because Kaanapali is the name of the region of Maui that Kaanapali Land LLC owns land in, this report will refer to the business as KANP.

The island of Maui was formed by two volcanos that grew next to and eventually into each other. This is referred to as a volcanic doublet. The western part of the doublet is mostly mountainous forest reserves in the interior. Moving “makai”, meaning “towards the sea” in Hawaiian, the landscape changes to agricultural land.  Finally, the coastal areas are filled with residential and commercial activity. It is on the western coast of the west side of Maui that Kaanapali is located, minutes away from the Kapalua Airport.

KANP has a rich history going back over 150 years. In the beginning, the company was called the H. Hackfeld & Company and began as a general store opened by a German boat captain, only later branching into other activities such as sugar production land ownership. Through a series of events around the time of World War I, it became acquired by a group of businessman and was renamed American Factors and later Amfac. Amfac was one of the “Big Five” in Hawaii, a powerful group of corporations that controlled 90% of sugarcane production – a huge component of Hawaii’s economy – during part of the 20th century. During this time, sugarcane production was Amfac’s focus, and at its peak it owned 60,000 acres of Hawaiian land. Because of their control over such a huge portion of the economy, the Big Five wielded a large degree of political clout. In the 1950s, political change and international competition damaged the economics of sugarcane production in Hawaii, and the Big Five entered a period of decline that was characterized by declining sugarcane production and diversification into other industries. In 1988, Amfac was bought out by JMB Realty for $920 million, a very large real estate developer based out of Chicago. During the continued period of sugarcane decline, much of the property related to sugarcane and other activities was sold off. In 2002, Amfac declared chapter 11 bankruptcy due to operating losses related to agricultural operations and to a lesser extent other smaller operations including golf course businesses, coupled with an unmanageable debt load. The business emerged from bankruptcy in 2005 as Kaanapali Land, LLC and is the reorganized entity from Amfac Hawaii and a few other entities. The stock became available over the counter in 2007. Today, KANP is focused primarily on land development, although it produces a small amount of coffee, too.

Before proceeding, it is relevant to mention that KANP is similar to another business that has been discussed on Focused Compounding: Maui Land & Pineapple (MLP). If you have not read the report on MLP, it is recommended you do so, as understanding MLP will help with understanding …

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Andrew Kuhn July 12, 2018

LEAPS: The Joel Greenblatt Way to Bet on Entercom (ETM) and GameStop (GME)

Member Write-up by VETLE FORSLAND

Investing in companies with big upsides (and big downsides) with LEAPS, instead of common stock, to up your return (and minimize risk)


If you believe that a stock is excessively mispriced, and you want to buy that stock, there is a way for you to translate a say, 30% gain into a triple digit gain. It’s called LEAPS, or “Long-Term Equity Anticipation Securities”, and if used wisely, it is one the best ways to leverage your investment returns as a retail investor. Joel Greenblatt wrote about it in “You Can Be A Stock Market Genius”, where he described it as a tool that “has many of the risk/reward characteristics of an investment in the leveraged equity of a recapitalised company”. I recommend reading his bit on LEAPS, starting on page 213, as Greenblatt himself can show its pros and cons much better than I ever could. But, the strategy is basically buying stock options that expire 2 years down the road. Stock options are usually not attractive for long-term investors as they don’t allow sufficient time for a larger repricing, and are dependant on a short-term catalyst. However, as you can own LEAPS up till two years, chances are a stock that is severely and obviously mispriced will reach (or get close to) its fair value during your holding period.


Since, LEAPS are basically long-term options, how do options work? You can buy put options and call options, but in this case we will just look at calls, which is basically the right, but not the obligation, to buy a stock at a specified price within a specified time. For instance, let’s say you purchase a call option on shares of GameStop (GME) with a strike price of $16 and an expiration date of August 10th 2018. This option contract would give you the right to purchase 100 shares of GameStop at a price of $16 on August 10th, but as this right is only valuable if GameStop is trading above $16 on the expiration date, you risk expiring the option valueless. Right now, you can buy one call option on GameStop for August 10th for $0.50, which represents 100 underlying shares of stock, so the cost of a trade of 100 call options will be $5,000 (($0.50 x 100) x 100 shares. If by August 10th, GameStop trades at $17, the buyer could use the option to purchase those shares at $16, then immediately sell them for $17. Therefore, the option will sell for $1 on August 10th, and as each option represents 100 underlying shares, and our hypothetical trader bought 100 options, this will all total a sell price of $10,000. Because the trader bought this option for $5,000, the net profit equals $5,000 – comparably, a common stock buyer would have had to invested $160,000 to make the same profit from the same trade.


If, however, GameStop stock trades for $16.50 at the expiration date, …

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Geoff Gannon July 10, 2018

Doubt as a Discount

To Focused Compounding members:
Let’s play a game. I ask you a series of questions. You give me a series of answers. I then test the answers you give to prove them false using as unfavorable a definition of false as I feel like. You have $1,000 in your pocket. You can’t leave the room. You can’t use your phone. And you can’t take off your shoes. I offer you even money odds on each of the following questions asked in succession: 1) What is your gender? 2) How old are you? 3) Who is your biological father? 4) What is your shoe size? 5) How tall are you? 6) How much do you weigh? 7) How many times will you go to the gym this week?
To complete this game, you need to give me seven pairs of answers. One, what percent of the money in your pocket are you betting? And two, what’s your answer. This game can end with you having anywhere from $0 to $128,000. Now: get out an index card. And write down your 7 answer pairs. Don’t read on till you’ve done that. Okay. Let’s assume you did bet all $1,000 that your gender is male. Should you have bet 100%? To answer this question, we need to know what the chances are that you would think you’re male and yet I could prove that answer false under the strictest test. If we assume the only way you could win this bet is if you said male and your chromosomes are “XY” and only “XY” then we can create a range of chances that someone might say they are male and yet fail this test. By my estimates, more than 98% of males would have no doubts they were male and be right even if subjected to the “XY” only test, perhaps up to 2% (an over estimate) of males would have doubts and could lose this bet under the strict “XY” only test, and about 0.2% might not have any doubts and yet could lose this bet. How should you have bet?

One way for figuring out how much to wager on each of a series of bets is the Kelly Criterion. I haven’t met any investors who say they use the “full Kelly”. However, I have met investors who say they use “a third Kelly”. Say the Kelly Criterion tells you to bet 96% on the answer “Male”. Someone using a third Kelly would bet 32%. The third Kelly leads to a bad bet here. Why? The Kelly Criterion sets the limit of how much you should bet given the chances and odds you’ve plugged into the formula. In the case of the gender question: a full Kelly doesn’t ask if you understood what I meant by male. Meanwhile, a third Kelly applies a 67% doubt to your own thinking about every problem you encounter. Betting 32% on the answer “Male” is like saying you’re 98% sure you’re male as you understood …

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Geoff Gannon July 1, 2018

Stylistic Skew

To Focused Compounding members:
This week, Vetle Forsland was our guest for two podcast episodes. One was about GameStop (GME). The other was about Entercom (ETM). You should listen to them both. What stood out to me in those two episodes was Vetle’s style as a stock picker. GameStop sells – among other things – physical copies of video games. Entercom owns terrestrial radio stations. A lot of investors think these two stocks are in buggy whip businesses. And so, these investors don’t even bother trying to come up with an appraisal value for the businesses and compare that to the market price of the stocks. For most investors, these two stocks are unsafe at any price. But Vetle is willing to search through other investors’ trash to see if there is any treasure hidden there. That’s his stock picking style.

Vetle’s two podcast episodes went up the same week I started thinking about exactly what I’m going to put in the first letter I will have to write to clients of Focused Compounding Capital Management. The first letter to clients went out today. Andrew wrote that one. It discussed the general strategy those managed accounts will employ. But next month’s letter will be written by me, not Andrew. And it won’t be discussing general strategy – it’ll be talking specific stocks. That letter would be easier to write if each stock stood out as an utterly unique case. I could just rattle off five paragraphs about five different stocks. The problem is that there’s clearly a common – yet unconsciously woven – thread running through those five stocks. I noticed it the other day. I was looking over the five stocks sitting in the planned “Buy” pile for those managed accounts and glanced at a number we don’t normally talk about in these memos: “beta”. As you probably know, beta is an indicator of a stock’s volatility scaled to some index’s volatility. A beta of 1 would suggest similar volatility to the S&P 500. The five stocks in that “Buy” pile for the managed accounts have betas of: 0.64, 0.33, 0.19, 0.17, and negative 0.10. Now, I don’t put much stock in those betas because the actual correlation with the market for these stocks is probably pretty low. I doubt these stocks tend to be green on days when the market is green just to one-third or so of the extent the market is up and red on days when market is red just to one-third or so of the extent the market is down. So, that series of five betas doesn’t mean much. But, it does mean one thing. That wasn’t luck. You don’t draw betas of 0.64, 0.33, 0.19. 0.17, and negative 0.10 randomly out of a hat with every stock in it. Likewise, Vetle probably (a sample size of two is awfully small) doesn’t draw two investment write-up subjects out of a hat randomly and find that both of them just happen to be in industries …

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