Thursday, April 17, 2008

Joe Koster Interview, Part Deux

In January of 2007 I posted an interview with Joe Koster, an analyst for the firm where I had interned over the summer.

Since then Chanticleer earned 68% net to investors in 2007, by mining for micro-cap value stocks and doing intensive research and scuttlebutt, and the stock Joe mentioned in the first interview,Tandy Leather, is down over 65%.

Right Price Investing: In the last interview you talked about Tandy as one of the companies in your portfolio, and valued it in the $8.50-9 range, a lot has happened since then and it's currently trading below $3 per share, where do you value it now?

Joe Koster: We think the value is north of $6 for sure.

We think it will still be worth $8-10 once they get back to a more normal environment, although the time frame for getting there may be pushed back a bit. At the time of our first interview TLF was at about $7.80 per share, so I mentioned the margin of safety wasn't really there.

We got interested again when we though it was a fifty cent dollar, about $4.25-$4.50. It is now trading for book value which we think is solid, will still make a few million dollars in a tough environment, and you get a free option on the 51% of mineral rights they are entitled to on the land they own but don't use for operations. Management is great and the current price certainly looks attractive

RPI: So in short what has happened to Tandy's business to cause it to be abnormal right now, and how soon will they fix it?

JK: It really has just slowed down, like many other retail/consumer related businesses. They had put some infrastructure in place for growth and when growth slowed, the infrastructure ate into the profits a bit.

In 1996-1998, sales were down 10%, 10%, and 13% in those three years. Operating income for those years was $(305,700), $1,189,067, and $845,625 on sales of about $28mm, $25mm, and $22mm.

So although I can't give you a good estimate as to when sales will pick back up, I can say that I am pretty confident they'll continue to make money, grow intrinsic value by some amount, and that by buying around book value, I consider to a Mohnish Pabrai type of investment -- heads I win, tails I don't lose much.

RPI: You interviewed Pete Bevelin, author of Seeking Wisdom, and link to a lot of articles about mental models on your site, how would you recommend an individual investor learn to use mental models and then apply them?

JK: I am of course still early in the process myself, but I've found that it is amazing how they find their way into daily life once you've learned some of them.

For example, I think about Robert Cialdini's models in his book Influence all the time. After interviewing Mr. Bevelin, I read Charles Darwin's autobiography and got a vivid picture of a model that is useful for analysts.

Charles Darwin went through great effort to collect facts (through direct observation) and look for disconfirming evidence before he published a theory. He spent 20 years collecting facts before he published his thoughts in what became his most famous work, Origin of Species.
That model of intense fact finding before the theory is basically just the scientific method, but it became very vivid when I read Darwin's autobiography.

My recommendation would be for those new to the mental model/latticework/Munger process would be to read Poor Charlie's Almanack and let that take you to the next destination.
Different people may be more curious about certain disciplines and choose to start that process in different places, but as Mr. Munger and Mr. Bevelin have mentioned, psychology is very important. As for ways to apply mental models, if Charlie says checklists are the best way, that is probably the way to go.

RPI: As mentioned in the last interview Chanticleer does a lot of scuttlebutt before investing, do you believe this is possible for individual investors, if not what is the main thing you look at to gauge management’s integrity?

JK: I read somewhere that Seth Klarman once had (or maybe still has) a race horse named Read the Footnotes. I think the name of that horse is really great advice for individual investors, since very few actually do read the footnotes.

Most of the scuttlebutt we do is on the small companies we're looking at and although we find it useful, we know that we also have to be careful because company management usually has a rosy picture of where their company is heading and you don't want to let that attitude influence your objectivity. It is not a bad thing that they have that attitude, it is just important to be aware of it.

For individual investors who don't talk with management or do other scuttlebutt, I think they can get great insight by following the paper trail: What is the management team's track record? What have they done with the cash? Do they do what they say they're going to do? Are their interests aligned with shareholders? I think the answers to questions like these can go a long way in determining integrity.....and then buy with a big margin of safety just in case!

RPI: You have amassed a huge store on Amazon, are there a few less well-known books you would recommend to readers?

JK: Sure:
· Seeking Wisdom: From Darwin to Munger, 3rd Edition by the previously mentioned Peter Bevelin is really great.
· Competition Demystified : A Radically Simplified Approach to Business Strategy by Bruce Greenwald is one of the best $5.49 values you can find, in my opinion.
· The Long Tail: Why the Future of Business is Selling Less of More by Chris Anderson was really great,
· As was Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Poundstone.
· It is probably on the best seller list, but I highly recommend Isaacson's biography on Einstein.
· I just bought Speculative Contagion: An Antidote for Speculative Epidemics by Frank Martin and although I'm saving it for the plane trip to Omaha, I have read his last couple of annual letters and I think that it is going to be a great read.

For more from Joe, check out his blog and Chanticleer's site.

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